Introduction

The securitization process plays a pivotal role in the creation of mortgage-backed securities (MBS), which are instrumental in the functioning of the real estate and financial markets. This chapter delves into the intricacies of securitization, detailing how mortgage pools are formed and discussing the concept of specific pools and to-be-announceds (TBAs).

Formation of Mortgage Pools

Securitization involves bundling individual mortgages into pools, which are then transformed into tradable securities. This aggregation of mortgages serves to spread risk and increase liquidity. The formation of mortgage pools is a multi-step process:

• Originators and Aggregators: Mortgage originators, such as banks and lenders, originate loans and subsequently sell them to aggregators. Aggregators collect a variety of loans to create a diverse portfolio that meets certain criteria.

• Pooling: Aggregators group similar loans together to form mortgage pools. These pools are often classified based on factors like loan type, interest rate, geographic location, and creditworthiness of borrowers.

• Legal Structure: To create MBS, mortgage pools are typically organized into legal entities like trusts or special purpose vehicles (SPVs). This structure isolates the mortgages from the originating institution’s financial health.

Specific Pools and To-Be-Announceds (TBAs)

Within the realm of mortgage pools, there are specific pools and TBAs. These terms refer to different types of securities created from mortgage pools:

• Specific Pools: Specific pools consist of a predefined set of mortgages with specific characteristics. Investors know the exact composition of mortgages in these pools, allowing for more accurate risk assessment.

• To-Be-Announceds (TBAs): TBAs are a bit different. They represent a commitment to buy or sell a specified dollar amount of MBS at a future date. While the exact mortgages backing the TBAs are not known at the time of commitment, they must meet certain criteria defined by government-sponsored entities (GSEs) like Fannie Mae or Freddie Mac.