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Specified Pools

One-line definition

A specified ("spec") pool is an actual, identified agency MBS pool traded for its specific collateral characteristics — as opposed to a TBA trade, where the buyer accepts whatever "substantially similar" pools the seller delivers.

Vocabulary

  • Pay-up: the price premium a specified pool trades at over the generic TBA price for the same coupon/program, paid for more predictable (usually slower) prepayment behavior.
  • Low-balance pools: pools of mortgages with small original loan balances (e.g., under $85k, $110k, $125k cutoffs). A borrower with a small loan has little dollar incentive to pay the fixed costs of refinancing even when rates drop, so these pools prepay slower and more predictably than a generic TBA pool of the same coupon.
  • Geographic/LTV/loan-age concentration: pools identified by state, loan-to-value ratio, or loan age can also command a pay-up — each is a different lens on the same underlying question, "how predictable is this pool's prepayment speed?"
  • Discount vs. premium pay-up direction: predictable slow prepayment is valuable for a premium-priced pool (an investor who paid above par wants prepayments to happen slowly, since prepayment returns principal at par, below the price paid); predictable fast prepayment can instead be valuable for a discount-priced pool (prepayment at par is a gain relative to a price paid below par). Which characteristic commands a pay-up depends on which side of par the coupon sits.

Why PMs care

TBA is a convenience and a liquidity pool, not a claim on any specific loans — a PM who wants a particular prepayment profile (e.g., protection from fast refinancing in a rallying-rate environment) has to buy specified pools, not TBA, and pay for that certainty. Reading the dollar roll's implied financing rate on TBA doesn't tell you anything about a specific spec pool's financing — spec pools generally roll worse (less special, sometimes even negative specialness) than TBA, since a dealer can't deliver any pool to cover a spec-pool short, only the identified one. A mortgage REIT or bank managing extension/contraction risk (see MBS convexity) will often pay up for low-balance or seasoned pools specifically to reduce that risk, accepting a lower running yield for more predictable duration.

Why this isn't implemented in src/pm

The pay-up itself isn't a formula — it's a market-observed price premium that reflects the market's collective prepayment-speed forecast for a specific pool's characteristics relative to the generic TBA population, which requires either a full prepayment model calibrated to loan-level data or live market pricing, neither of which this repo's "small transparent function" style can responsibly approximate. The prepayment mechanics that are implemented — psa_cpr, refinancing_incentive_cpr, single_monthly_mortality — are the same functions that would, in principle, drive a spec pool's projected cash flows differently from a generic pool's; this repo doesn't have the loan-level or pool-level data to calibrate that difference pool-by-pool.

Common mistakes

  • assuming a pay-up is a fixed, quotable spread — it moves with the market's prepayment outlook the same way option-adjusted spreads do, richening when prepayment risk is most feared and cheapening when it isn't
  • confusing "specified pool" with "specified in the trade confirmation" — TBA trades also specify issuer/coupon/program in the confirm; what makes a pool "specified" is that the exact pool numbers are agreed at trade time, not just announced before settlement
  • assuming spec pools are always the safer choice — paying up for predictability is a real cost, and for an investor without a specific convexity concern, generic TBA (with its superior liquidity and roll economics) can be the better default

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