A proposal by the Financial Industry Regulatory Authority (FINRA) designed to reduce counterparty risk in the forward market for mortgage bonds troubles some market participants, who say that the measures could have the opposite effect.
At issue is the to-be-announced (TBA) market, where investors and lenders agree to buy or sell mortgage backed securities (MBS) on a future date. When these trades take place, the specific pool of mortgages that will be delivered to fulfill the contract is unknown. Parties agree only on the issuer, coupon, price, product type, amount of securities and settlement date. (The seller has two days to inform the buyer of the specific pools to be delivered.) TBA sales allow originators to hedge their interest rate risk and efficiently lock in interest rates for loan applicants throughout the origination process.