TBA trading and security issuance in the agency MBS market

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.