Mortgage Allocations

Dictionary Says

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.

Investopedia Says

Investopedia explains '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.

comments powered by Disqus
Hot Definitions
  1. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  2. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  3. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  4. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  5. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  6. IPO ETF

    An exchange-traded fund that focuses on stocks that have recently held an initial public offering (IPO). The underlying indexes tracked by IPO ETFs vary from one fund manager to another, but index IPO ETFs are usually passively managed and contain equities that have recently been offered to the public.
Trading Center