The Real Effects of Secondary Market Trading Structure: Evidence from the Mortgage Market
69 Pages Posted: 10 May 2019 Last revised: 20 Aug 2020
Date Written: August 10, 2020
By allowing different agency mortgage-backed securities (MBS) to be traded based on limited characteristics, the to-be-announced (TBA) market generates liquidity and benefits the MBS market broadly. We quantify effects of the TBA structure on mortgage borrowers. Exploiting discontinuities in TBA eligibility, we estimate that TBA eligibility reduces mortgage rates by 7 to 22 basis points. TBA eligibility benefit is larger for mortgages with higher expected prepayments. We also find that TBA eligibility affects refinancing, which has implications for monetary policy transmission. Our finding is relevant for policies such as housing finance reforms and Uniform MBS.
Keywords: mortgage-backed securities, liquidity, primary market, TBA trades, refinancing, mortgages
JEL Classification: E44, G10, G21
Suggested Citation: Suggested Citation