MBS TBA

Mortgage pass-through securities are created when mortgages are pooled together and sold as undivided interests to investors. Usually, the mortgages in the pool have the same loan type and similar maturities and loan interest rates. The originator (for instance, a bank) may continue to service the mortgage and will "pass through" the principal and interest, less a servicing fee, to an agency or private issuer of mortgage-backed securities. Mortgages are then packaged by the agency or private issuer and sold to investors. The principal and interest, less guaranty and other fees are then "passed through" to the investor, who receives a pro rata share of the resulting cash flows. Most agency pass-through securities, however, trade on a generic or to-be-announced (TBA) basis. In a TBA trade, the seller and buyer agree to the type of security, coupon, face value, price, and settlement date at the time of the trade, but do not specify the actual pools to be traded. Two days before settlement, the seller identifies the specific pools to be delivered to satisfy the commitment. Trading in agency pass-throughs may take place on any business day, but TBA securities usually settle on one specific date each month. The Public Securities Association releases a monthly schedule that divides all agency pass-throughs into six groups, each settling on a different day. Agency pass-throughs generally clear through electronic book-entry systems. Nonagency pass-throughs are composed of specific pools and do not trade on a TBA basis. New issues settle on the date provided in the prospectus. In the secondary market, these securities trade on an issue-specific basis and generally settle on a corporate basis (three business days after the trade).