TBA Trading and Security Issuance in the Agency MBS Market

Abstract

Agency MBS are traded via both specified pool (SP) contracts for individual securities and to-be-announced (TBA) contracts for a cohort of heterogeneous securities. We document three economic effects of this secondary-market structure on MBS issuers' security design strategies: (1) low-value and high-value loans are securitized into separate groups of MBS sold in TBA and SP markets respectively; (2) issuers pool low-value loans together into TBA MBS, but separate high-value loans into different SP MBS; (3) larger issuers take more advantage of TBA trading when designing MBS. We further show that TBA-trading-induced strategic MBS design increases issuers' selling revenue by 36% of the SP transaction costs.

Keywords: Cohort, MBS, Security design, Specified pool, TBA.

JEL Classification: D4, G2