TBA trading and security issuance in the agency MBS market

Yu An, Wei Li and Zhaogang Song

Real Estate Economics, 2025, vol. 53, issue 3, 607-642

Abstract: In addition to the standard individual‐security‐based specified pool (SP) contract, agency mortgage‐backed securities (MBS) are actively traded via the to‐be‐announced (TBA) contract that sets a uniform price for a cohort of heterogeneous securities. We provide empirical support for the economic impact of TBA trading on MBS issuers' security design: issuers pick low‐quality loans and pool them together into few TBA MBS. We then conduct a quantitative analysis and show that TBA‐trading‐induced strategic MBS design increases issuers' selling revenue by about 55% of the SP transaction costs. Finally, we show that smaller issuers are less able to package low‐quality loans separately from high‐quality ones and hence benefit less from TBA trading.

Date: 2025
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