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this is probably a naming issue - but i am totally confused as the documentation is never clear. I understand well what a generic TBA is, what is a "STIP"? is it also a form of TBA? One doc I read, said - you can also get Specific TBAs (i.e a Spec Pool forward), is that true (assume bilateral mkt provides what I ask for...but is this a liquid security)? I assume:

  1. Specific Pools (eligible for delivery into gen TBA) - trade at a prem to TBA
  2. STIPs should also trade at a prem to TBA
  3. There are certain spec Pools which trade at a discount (but those are likely not deliverable to TBA - i.e. those which may be prepaid)

Is this all correct? any document which has clear language as to what all these things are would be appreciated. This field seems to be plagiarized with many documents, but all of them use fairly lose wording/are inaccurate vs each other.

Thanks

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2 Answers 2

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Those are all basically true. A TBA is an an agreement between 2 counterparties for the short counterparty to deliver to the long counterparty a mortgage pool which satisfies certain criteria (when originated , coupon, geographical diversity, and some others) the point being they are sufficiently similar to be eligible. The price of the TBA reflects the fact that the seller has a lot of freedom to choose. If you as the buyer want to narrow the seller,s choice, then you have to pay. This narrowing is called a Stip (stipulation). The narrowest of all stips is to demand an exact bond.

Lastly there are some mortgage pools which look like the ones deliverable into TBA but they aren’t for some reason (eg jumbo loans). These have less liquidity than deliverables so they trade at a discount.

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  • $\begingroup$ Is there a quick way to find out which pass throughs are deliverable into which TBA ? (Outside of manually inferring from good delivery guidelines)? (Bbg don't have this info.. which I was quite surprised by) $\endgroup$
    – user68819
    Commented Oct 8, 2023 at 7:51
  • $\begingroup$ Thank you @dm63 - very helpful. $\endgroup$
    – user67825
    Commented Oct 8, 2023 at 17:35
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To complement dm63's answer, if you are looking for a document with precise definitions for what is deliverable into TBA, try the official guidelines established by SIFMA: Standard Delivery Requirements. See Section 3 of TBA Trading and Liquidity in the Agency MBS Market for a solid description of the TBA market and the closely-related Specified Pool Market.

I'll expand a little more since you also appear to be asking about what's TBA deliverable. The Agency MBS TBA market consists of several sub-sectors including the 30-year UMBS Market, the 15-year UMBS market, the 30-year Ginnie Mae II Multi market etc. At the very broadest level, for each of these subsectors, there's a collection of pool prefixes that are deliverable into TBAs. To get a sharper definition, from the universe of TBA-eligible pools take out:

  • All specified pools: essentially any pool that commands a payup for any reason (general categories of such pools include low loan balance pools, geographically concentrated pools etc.)
  • Locked up pools: Adjust each TBA-eligible pool's outstanding balance by the locked up amount in CMOs, the Fed etc.

There is now another level of filtering applied to this restricted universe to find the subset of pools with the most undesirable prepayment characteristics. Other considerations include projected origination volumes, forward interest rates etc. Putting all of these ingredients together gives you the TBA deliverable for a month. As you can see from the above description, there is no straightforward algorithm that will tell you what the TBA deliverable is from month-to-month, and it is essentially defined by the combined perception of all market participants with respect to the related considerations.

However, we can retrospectively track the TBA deliverable on a month-by-month basis by accessing a few through-the-box (TTB) reports compiled by broker-dealers who make markets in Agency MBS. This report compiles the average collateral characteristics by coupon of what is going through the "box" -- i.e., actually settling (pools directly held on balance sheet by the broker-dealer and pools to be delivered from one customer to another).

Until recently, one could have also scrutinized the publicly-reported characteristics of the Fed's MBS purchases but this is likely to be less important in the future with the Fed letting its MBS balance sheet decline.

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  • $\begingroup$ thank you. In the document regarding "TBA trading.." page5. right before section 3.1 begins - it says specified pools trade outside the TBA market. Do they means: 1. Certain Spec pools by definition are not TBA deliverable due to them not being conforming (thus they trade outside TBA market as a cash product) $\endgroup$
    – user67825
    Commented Oct 8, 2023 at 16:45
  • $\begingroup$ 2. Other trade outside the market (by default) as no one would ever deliver these into the TBA to begin with as they are 'rich' securities due to their prepayment characteristics or otherwise.. Then it moves onto talking about TBA STIPs which like what was discussed above are a form of TBA, just where I constrain what I want delivered (if I am long). Is this the correct interpretation of what they are trying to get at? $\endgroup$
    – user67825
    Commented Oct 8, 2023 at 16:50
  • $\begingroup$ Yes -- that is correct. To repeat: There are two types of "specified pools": TBA-eligible (for example, 100% NY FNMA CL-prefix pools) and non-TBA-eligible (for example, Jumbo CK-prefix pools). TBA-eligible spec pools are typically not delivered into TBA because of their favorable prepay characteristics but can be if financing rates are really attractive. TBA Stips are as you describe. $\endgroup$
    – Sharad
    Commented Oct 8, 2023 at 17:27
  • $\begingroup$ invaluable information. Thank you @Sharad. I may be back with more questions. but for now I have a lot to read & understand. $\endgroup$
    – user67825
    Commented Oct 8, 2023 at 17:35

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