How Non-TBA Mortgage-Backed Securities Settlement Dates Work
Summary
Non-TBA mortgage-backed securities are over-the-counter instruments, so buyers and sellers can agree to settle on dates of their choosing. Accrued interest and the timing of payments from the underlying mortgage collateral can make some dates operationally inconvenient, but they do not prevent parties from agreeing to a nonstandard date.
In market practice, settlement is commonly described relative to the front TBA settlement date for a comparable security: early means before it, regular means on it, and late means after it. The answer illustrates the convention with a Freddie Mac pool and an April settlement schedule, and notes that Fannie Mae and Freddie Mac pools reference UMBS class dates. The respondent estimates that most non-TBA trades settle regularly, while acknowledging this is based on personal experience. They generally saw dates within about a week of the regular date; that observation is anecdotal, not a universal limit.
Key ideas
- Non-TBA MBS settlement dates are negotiated between the trading parties.
- Accrued interest and collateral payment schedules can make some settlement dates operationally difficult.
- Early, regular, and late settlement describe dates relative to a comparable front TBA settlement date.
- The account describes regular settlement as the most common convention, based on the respondent’s experience.
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Full text
# Mortgage Backed Securities Settlement Date # Mortgage Backed Securities Settlement Date How do settlement dates for non-TBA MBS work? Thanks, VVKK ## Answer by Thomas Boyd (score 6, accepted) https://quant.stackexchange.com/a/61999 Non-TBA MBS are OTC instruments that, in practice, can settle on any date two trading parties agree to. There are operational complexities introduced by accrued interest and underlying collateral payment schedules that make certain times of the month difficult for non-standard settlements, but again, like any OTC transaction, any settlement date is possible. In reality though, non-TBA MBS settlement dates are actually specified in reference to TBA Class settlement dates. We trade non-TBA MBS on "early", "regular", or "late" settlement, specified in reference to TBA Class settlement. MBS sold for "early" settlement will have a settlement date prior to the front TBA of similar amortization, guarantor, borrower profile etc. Selling $10M 2.5% FHLMC 30YR 225K Loan Balance pool for 4/10/2021 settlement would be selling that pool for "early April settle" (4/10/2021 is before regular Class A settlement of 4/14/2021). The vast majority, I'd guess 90%, of non-TBA MBS are sold for "regular" settlement, meaning they settle on the same day as the front TBA of similar amortization, guarantor, borrower profile etc. Example: Selling a $10M 2.5% FHLMC 30YR 225K Loan Balance pool for 4/14/2021 settlement would be selling that pool for "regular April settle" (4/14/2021 is regular Class A settlement day). MBS sold for "late" settlement will have a settlement date beyond the front TBA of similar amortization, guarantor, borrower profile etc. Selling $10M 2.5% FHLMC 30YR 225K Loan Balance pool for 4/18/2021 settlement would be selling that pool for "late April settle" (4/18/2021 is after regular Class A settlement of 4/14/2021). (note that both FHLMC and FNMA guaranteed pools would specify "early", "regular" or "late" settle in reference to UMBS Class settlement dates) In my time selling securitized mortgages for a retail originator I never saw MBS securities settle more than a week prior or a week post regular TBA Class settlement days. I'm sure it happens though.
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