General Description of TBA MBS Market
“To-Be-Announced” Trading of Agency Passthrough Securities
Much of the volume in the agency MBS market today is in the form of “To-Be-Announced” (TBA) trading. A TBA is a contract for the purchase or sale of agency mortgage-backed securities to be delivered at a future agreed-upon date; however, the actual pool identities or the number of pools that will be delivered to fulfill the trade obligation or terms of the contract are unknown at the time of the trade. The TBA market is based on one fundamental assumption – homogeneity. TBA trading is based on the assumption that the specific mortgage pools which will be delivered are fungible, and thus do not need to be explicitly known at the time a trade is initiated. At a high level, one pool is considered to be interchangeable with another pool.
Actual mortgage pools guaranteed by one of the Agencies are subsequently “allocated” to the TBA transactions to be delivered upon settlement. Settlement dates are standardized by product type (e.g. 30 year FNMA/Freddie Mac pools, 30 year Ginnie Mae pools, 15-year pools). Monthly settlement date calendars for the TBA market are published one year in advance by a SIFMA committee on a rolling 12-month basis. This is done to increase the efficiency of the settlement infrastructure. Pools may, however, be settled on days other than the established settlement date if the parties to the trade so desire.
For example, in a typical trade, a buyer may ask to purchase $100 million of 30 year Fannie Mae MBS with a 6% coupon for delivery next month. The buyer does not know the exact bonds that will be delivered. According to industry practice, two days before the contractual settlement date of the trade, the seller will communicate to the buyer the exact details of the MBS pools that will be delivered.
The TBA market is the most liquid, and consequently most important, secondary market for mortgage loans in the world. In this current time of distress, the importance of the TBA market is only heightened, and it is difficult to exaggerate the terrible consequences of a loss of confidence in, withdrawal from, or general upward repricing of risk in this market. The effects would be directly and immediately felt by the average mortgage borrower.
TBA trading enables mortgage lenders to sell product forward through primary originations, by securitizing the mortgages for purchase in the secondary market. To allow mortgage lenders to hedge or fund their origination pipelines, TBA settlements are often scheduled significantly ahead of the date on which the transaction is negotiated. This permits the lenders to lock in a price for the mortgages they are in the process of originating.
Pools delivered to settle a TBA obligation may be either newly issued or “seasoned.” There are circumstances in trading TBAs where counterparties agree that the pools to be delivered must meet certain stipulations or “stips”, such as issuance year and/or month; or minimum or maximum percent in a particular geographic state or region, or others.
SIFMA’s Role in the TBA Market
SIFMA and its predecessor organizations have long played a central role in the TBA market. The genesis of this role began in the 1970s, when members of the Government Securities Dealers Association began to discuss standards for the trading and settlement of bonds issued by Ginnie Mae. In 1981, the Public Securities Association published the “Uniform Practices for the Clearance and Settlement of Mortgage-Backed Securities and Other Related Securities”, which is a manual that contains numerous of market practices, standards, and generally accepted calculation methodologies developed through consensus discussions of market participants, that are widely accepted and used in the MBS and asset-backed security markets.
Participants in the TBA market generally adhere to market-practice standards commonly referred to as the “Good-Delivery Guidelines”, which comprise chapter eight of this manual. These guidelines cover a number of areas surrounding the TBA trading of agency MBS, and are promulgated by and maintained by SIFMA, through consultation with its members. The purpose of the guidelines is to standardize various settlement related issues to enhance and maintain the liquidity of the TBA market. Many of the guidelines are operational in nature, dealing with issues such as the number of bonds that may be delivered per one million dollars of a trade, the allowable variance of the delivery amount from the notional amount of the trade, and other similar details.