The TBA market is widely viewed as an essential element of a functioning mortgage market, serving as both the ultimate source of liquidity and a crucial pricing benchmark for housing finance. However, the market has evolved significantly over the last few years; a major change has been the growth of the specified pool sector. This column will examine this development and its implications for the MBS and mortgage markets.
Specified pools are those that trade away from the TBA market. Specified pool trading is more than 25 years old; the creation of new-origination specified pools, in which originators segregate and sell prepayment-advantaged loans separately from their generic production, began in the late 1990s, as analysts identified loan characteristics that resulted in consistently different prepayment behavior. However, the share of MBS issued and traded away from the TBA market has exploded over the past few years, to the point that 40% or more of the MBS market now trades as specified pools of some sort.