MBS EDUCATION UPDATE: A PREVIEW

Here are a few paragraphs from recent knowledge base writings...

"This TBA trading mechanism plays an important role in the factors that determine primary mortgage rates. The "to-be-announced" trade arrangement allows originators to sell a pipeline of loans before the commitments (individual loans) actually close and fund! Why do they need to do that? Well what happens if in 15 days when your loan closes...rates have moved higher?  Secondary would not want the bid to adversly react to their supply/pool of below market rate loans....on large commitments that could be quite costly! So here's what they do....

When you commit to sell a locked loan to an investor they automatically assign it a position in their  pipeline. This information is obtained via investor registration/lock forms. Once a previously determined amount of  similar loans are registered in their pipeline, the mortgage banker's secondary marketing department will select an appropriate time to lock in loan profits/protect the mortgage banker from expected interest rate volatility.

Note: Makes you feel like you should submit accurate lock requests doesn't it? If it doesn't it should! It would aid in a smoother process. Moving on...

They accomplish this by selling forward a commitment to deliver this "pool in the making" to a specified buyer at a specified settlement date....thereby exiting the market and effectively hedging against interest rate risk/mainting expected profit margins.

Note: this is when/why investors adjust their pricing strategies to deter/promote production of loans in specific coupon ranges.

Long story short the TBA MBS trading improves mortgage market liquidity and facilitates lower primary mortgage rates. Oh and when Matt and I refer to originator hedging...now you know this is what we mean!"

Ramblings of a Mad MBS'r!!!

...thats all you get!