Authors: James Vickery and Joshua Wright

• Since the financial crisis that began in 2007, there has been an important shift in the way mortgages are funded in the United States.
  
  
• While the market for mortgage securitization by private financial institutions has experienced low levels of activity since 2007, the agency mortgage-backed-securities (MBS) market has remained robust.
  
  
• What distinguishes these two markets is that in the agency MBS market, each bond carries an explicit (or implicit) credit guarantee by Fannie Mae, Freddie Mac, or Ginnie Mae.
  
  
• A second, less widely recognized feature of agency MBS issuance is the existence of a liquid forward market for trading agency MBS: the to-be-announced (TBA) market.
  
  
• More than 90 percent of agency MBS trading volume occurs in the TBA market. In a TBA trade, the exact securities to be delivered to the buyer are chosen just before delivery, rather than at the time of the original trade.
  
  
• The liquidity of the TBA market improves market functioning and helps mortgage lenders manage risk, since it allows them to “lock in” sale prices for new loans as, or even before, those mortgages are originated.
  
  
• Vickery and Wright present preliminary evidence suggesting that the liquidity associated with TBA eligibility increases MBS prices and lowers mortgage interest rates.
  
  
• Using variation in TBA eligibility rules, the authors estimate the liquidity premium associated with the TBA market to be of the order of 10‑25 basis points during 2009 and 2010, and magnified during periods of market stress.
  
  
• The presence of a government credit guarantee alone does not appear to be sufficient explanation for the liquidity of agency MBS.
  
  
• The study argues that the TBA market plays a valuable role in the mortgage finance system, and that evaluations of proposed reforms to U.S. housing finance should take into account the reforms’ effect on the operation of the market.
  
  

James Vickery is a senior economist in the Research Group of the Federal Reserve Bank of New York; Joshua Wright is a policy and markets analyst on the open market trading desk of the Federal Reserve Bank of New York.

The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.