DEFINITION of 'Drop'

The difference in price between the front month and back month in a mortgage-backed security (MBS) dollar roll trade. A dollar roll is a popular type of trade in the MBS pass-through TBA market.

According to forward securities pricing theory, the front month price should be higher than the back month price. The drop is a function of current short-term interest rates, prepayment estimates, and the supply and demand for pass-throughs in the current delivery or front month.

BREAKING DOWN 'Drop'

A pass-through TBA security is said to be trading through fail when the drop is larger than what it would cost a mortgage originator, investor or securities dealer to fail to deliver into a TBA contract for an entire month. When there is a shortage of supply or extreme demand for a TBA security in the current delivery month, the drop can increase to fail or larger, reflecting the fact that securities dealers would rather roll a trade out an additional month at a large drop or fail to deliver that security for an entire month than make delivery in the current month.

RELATED TERMS
  1. To Be Announced - TBA

    A term used to describe a forward mortgage-backed securities ...
  2. Dollar Roll

    A type of repurchase transaction in the mortgage pass-through ...
  3. Assignment Of Trade

    A transaction used primarily in the mortgage-backed securities ...
  4. Mortgage Allocations

    A process used in the settlement of mortgage-backed security ...
  5. Current Coupon

    The to-be-announced (TBA) mortgage security of any issue for ...
  6. Pass-Through Rate

    The rate on a securitized asset pool - such as a mortgage-backed ...
Related Articles
  1. Investing

    What Happened To The MBS Market?

    Find out how the fall of mortgage-backed securities has changed the financial landscape.
  2. Investing

    Top 3 Mortgage Backed Securities (MBS) ETFs (MBB, MBG)

    Discover some of the best opportunities for investors seeking exposure to mortgage-backed securities through utilizing exchange-traded funds.
  3. Investing

    The ABCs of Mortgage-Backed Securities ETFs

    ETFs focused on mortgage-backed securities, or MBS, offer an opportunity to further diversify the fixed-income portion of your portfolio.
  4. Investing

    MBB: iShares Barclays MBS Bond Fund ETF Analysis

    Explore the iShares MBS ETF and see how this fund composed of agency-issued mortgage debt compares to similar ETFs in the category.
  5. Investing

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
  6. Investing

    Profiting Off of Increased Mortgage Rates (PTRIX,FMSFX,VMBSX)

    Learn why mutual funds that invest in mortgage-backed securities (MBS) are worth a look for investors wanting to capitalize on rising mortgage interest rates.
  7. Personal Finance

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  8. Investing

    VBMFX: Overview of World's Largest Bond Mutual Fund

    VBMFX: Find out top positions in the world's largest bond fund, the Vanguard Total Bond Market Index Fund.
  9. Investing

    Introduction To Asset-Backed And Mortgage-Backed Securities

    In this article, we will go through the structure, along with some examples of ABS and valuation.
  10. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Answer >>
  2. Why do MBS (mortgage-backed securities) still exist if they created so much trouble ...

    Read several different arguments in favor of allowing the trade of mortgage-backed securities, even after the financial crisis ... Read Answer >>
  3. What are the best ways to invest in mortgage-backed securities (MBS)?

    Find out how you can start investing in real estate through mortgage-backed securities. Read Answer >>
  4. Are mortgage-backed securities backed by any guarantees?

    Actually, any mortgage-backed security (MBS) guarantee depends on who issued it.To review, an MBS is a security, created ... Read Answer >>
  5. What's the difference between a collateralized mortgage obligation (CMO) and a mortgage-backed ...

    Find out more about collateralized mortgage obligations and mortgage-backed securities and the difference between the two ... Read Answer >>
  6. Can small investors buy collateralized mortgage obligations (CMOs)?

    Read about collateralized mortgage obligations and their relationship with small investors, plus what risks small investors ... Read Answer >>
Hot Definitions
  1. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  2. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  5. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  6. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
Trading Center