TBA Trading Seen as Vital to Healthy, Liquid Mortgage-Backed Securities Market
While the fate of the government sponsored entities (GSEs) remain in the balance, and financial reform is beginning implementation, securitization players and regulatory enforcers agreed this week on one thing: the TBA market for mortgage-backed securities must be kept largely in place. Therefore, any potential reform of the housing-finance system must maintain the current TBA structure for trading agency MBS, New York Fed economists James Vickery and Joshua Wright said in a research note this week. This view was also repeatedly pushed at Tuesday's housing conference at the US Treasury, especially so in the spotlight meeting with industry and government sources on the role of securitization in the funding of more affordable mortgage products. That meeting brought together representatives from investment banks, trade groups and government compliance offices. One characteristic of trading GSE MBS is the explicit guarantee of the government backing of the debt. A second distinguishing feature of the $5.27trn market for Fannie Mae, Freddie Mac and Ginnie Mae MBS is the “to be announced,” or TBA, function, which dominates most agency mortgage bond trading activity. The term TBA is derived from the fact that the actual mortgage-backed security that will be delivered to fulfill a TBA trade is not designated at the time the trade is made. The securities are "to be announced" 48 hours prior to the established trade settlement date. In a TBA trade, the seller agrees on a price, maturity, coupon, and face value of the bonds without specifying what securities will be delivered to the buyer on the agreed upon closing date. In 2008 and 2009, some $2.89trn of agency MBS was issued, while no new non-agency securitizations occurred in those years. With limited non-agency issuance, secondary markets for trading that type of MBS has become extremely illiquid, the economists said. Whereas annual agency trading volume has averaged about $300bn since 2005, and TBA trading provides the best platform for increasing MBS prices and reducing mortgage rates. “This TBA trading convention enables an extremely heterogeneous market consisting of thousands of different MBS pools backed by millions of individual mortgages to be reduced – for trading purposes – to only a few liquid contracts." the NY Fed economists wrote in a staff report published Thursday. "TBA prices, which are publicly observable, also serve as the basis for pricing and hedging a variety of other MBS that do not trade in the TBA market.” This encourages “participation from a broader group of investors, notably foreign central banks, and a variety of mutual funds and hedge funds, translating into a greater supply of capital for financing mortgages, and thus lower rates for homeowners," they said. Write to Jason Philyaw.