Published by CU Insight

The mortgage-backed security (MBS) market has seen some changes in 2021 stemming from the Federal Housing Finance Agency (FHFA), the agency responsible for regulating Fannie Mae and Freddie Mac (the “GSEs”). Perhaps the most notable is the cash window cap, which restricts lenders to $1.5 billion in loan sales on a 4-quarter basis to each one of the agencies. In effect, this would likely lead to a growing number of MBS issuers. Agency MBS issuance has burgeoned over the last year. According to data from the Securities Industry and Financial Markets Association (SIFMA), 2020’s $3.3 trillion in Agency MBS issuance is double the prior decade’s average and the highest year on record. Whether lenders are securitizing on their own or not, now may be a good time for a refresher on hedging mortgage lending with securities.


Hedging mortgage pipelines with securities involves using the to-be-announced (TBA) MBS market. A TBA MBS contract, or simply TBA, is a contractual agreement to buy/sell Agency MBS at a future date at a specified price. It is a forward contract, making it a derivative instrument. Much like futures contracts on financial instruments, these contracts can be used to manage risk, and the delivery of the underlying securities need not occur through the process of cash settling. Hedging is a tool used to ensure the price change of a group of loans is offset by the value of a change in the hedging instrument. 

The TBA market itself is very large. As mentioned before, Agency MBS issuance is in the trillions of dollars annually with hundreds of billions of dollar volume traded daily. TBA pricing and trading can be accessed through TradeWeb, an electronic trading platform, along with numerous other market makers. Figure 1 shows an example of TBA pricing. FNCL refers to 30-year Agency MBS and FNCI refers to 15-year Agency MBS. Pricing quotes are in 32nds; a “tick” refers to 1/32nd while a “+” refers to one-half of a 32nd. For example, FNCL 2’s bid price, which is a contract to sell 30-year 2% coupon Agency MBS, is 100.86, calculated as: 100 + (27.5/32).

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