Mortgage Allocations

DEFINITION of 'Mortgage Allocations'

A process used in the settlement of mortgage-backed security to-be-announced (TBA) trades. This process requires that the sell side of a TBA trade inform the its buy-side counterpart of the exact securities that will be delivered into the trade by no later than 3 pm EST, and 48 hours prior to the established trade settlement date. In addition, each trade must be broken down into $1 million lots, and each lot can contain no more than three pools. A 0.01% variance is allowed on each $1 million lot. Most participants in the TBA market have software that helps them with mortgage allocations.

BREAKING DOWN 'Mortgage Allocations'

As the TBA market developed in the 1980s and 1990s, mortgage allocations were done manually or with limited software. The day 48 hours prior to major settlement days, known as "48 hour day", was a hectic and stressful day for TBA securities dealers and other market participants.

The allowed variance on TBA trades was initially much higher than the 0.01% it is today, and traders used this "allocation option" to make arbitrage profits. For example, if the current market price of a TBA trade was higher than the actual trade price, a trader could use the allowable variance to deliver a minimum amount into the trade, sell the difference at the current market price and realize the difference in prices on the dollar amount of the allowable variance as profit.

The exact opposite could be done if the trade price was higher than the current market price; the trader would deliver as much as allowed by the variance into the actual trade and purchase the difference in the current market at a lower price. The reduction in the allowed variance to 0.01% and the advent of sophisticated software has made mortgage allocation much less hectic than it once was.

RELATED TERMS
  1. To Be Announced - TBA

    A term used to describe a forward mortgage-backed securities ...
  2. Current Coupon

    The to-be-announced (TBA) mortgage security of any issue for ...
  3. Drop

    The difference in price between the front month and back month ...
  4. Assignment Of Trade

    A transaction used primarily in the mortgage-backed securities ...
  5. Dollar Roll

    A type of repurchase transaction in the mortgage pass-through ...
  6. Variance

    The spread between numbers in a data set, measuring Variance ...
Related Articles
  1. Markets

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.
  2. ETFs & Mutual Funds

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  3. Managing Wealth

    Calculating Portfolio Variance

    Portfolio variance is a measure of a portfolio’s volatility, and is a function of two variables.
  4. Investing

    Exploring The Exponentially Weighted Moving Average

    Learn how to calculate a metric that improves on simple variance.
  5. ETFs & Mutual Funds

    VBMFX: Top 5 Holdings Analysis

    Find out which securities hold the top five positions in the world's largest bond fund, the Vanguard Total Bond Market Index Fund.
  6. Trading

    The Vital Importance of Choosing The Right Day Trading Software

    Software has made day trading quick and automatic--all the more reason to be as painstaking as possible when choosing the right one for your needs.
  7. Financial Advisor

    How To Become a Mortgage-Backed Securities Analyst

    Specializing in structured or derivative credit products like mortgage-backed securities requires education and prior experience in the mortgage field.
  8. Markets

    The Foundation Of Structured Settlements

    This annuitized payment setup should be arranged through impartial attorneys and tax agents.
  9. Personal Finance

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  10. Trading

    An Introduction To Day Trading

    This article will take an objective look at day trading, who does it and how it is done.
RELATED FAQS
  1. What is price variance in cost accounting?

    Understand what price variance is in relation to cost accounting. Learn the most common way price variance arises and how ... Read Answer >>
  2. How is an unfavorable variance discovered?

    Learn how unfavorable variance is discovered through defining budget numbers, such as standard rates for labor and materials, ... Read Answer >>
  3. Is variance good or bad for stock investors?

    Learn how high variance stocks are good for some investors and how diversified portfolios can reduce variance without compromising ... Read Answer >>
  4. What is the difference between standard deviation and variance?

    Understand the difference between standard deviation and variance; learn how each is calculated and how these concepts are ... Read Answer >>
  5. How much variance should an investor have in an indexed fund?

    Learn more about the significance of variance in index funds, its value as a measure of volatility and other common analytical ... Read Answer >>
  6. How can I measure portfolio variance?

    Find out more about portfolio variance, the formula to calculate portfolio variance and how to calculate the variance of ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center