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Pools delivered to settle a TBA obligation may be either newly issued or “seasoned.” Because mortgage-backed securities are ultimately backed by mortgage loans, as homeowners make monthly payments the mortgage pools are amortized. This means that the par value of mortgage-backed securities pools decreases on a monthly basis. Each month Ginnie Mae, Fannie Mae and Freddie Mac issue the current pool factors. Factors can be anywhere from one to zero. A factor of one means the pool is newly issued and has not paid down at all, and a factor of zero means the pool is completely paid down. The “original face” is the par value of a pool at the time of issuance. The “current face” is the current value of the pool and is determined by multiplying the original face of the pool by the current factor. The difference between the current face of a pool from one month to the next is the amount of principal that the investor (i.e. owner of the pools) has received.
There are circumstances in trading TBAs where counterparties agree that the pools to be delivered must meet certain stipulations or “stips”, such as issuance year and/or month. Some additional mortgage pool characteristics that are commonly stipulated are the Weighted Average Coupon (“WAC”), Weighted Average Maturity (“WAM”) and Weighted Average Loan Age (“WALA”). During the allocation process, only pools with the stipulated characteristics can be allocated to the trade. TBAs with Stipulations do not have to follow Good Delivery Guidelines for the stipulated term if both parties to the trade agree to the terms. For example, a common “stip” is a variance stip, where the variance of the trade is different than the 0.01% variance established by SIFMA. Another common stip is requiring one pool per million instead of the SIFA recommended number of pools per million.
Read more about TBA Netting
Read more about TBA Allocation and DNA
Read more about Netting Flat in the TBA Net