In the world of MBS, Class A and Class B dollar rolls happened this week. Class A, B, and C MBS (mortgage-backed securities) refer to the monthly settlement schedules that are designated for certain pools of MBS in the To-Be-Announced (TBA) market. These classifications help manage the timing of MBS settlements, with each "Class" grouping MBS pools that will settle in a different week of the month.
For those not working on secondary marketing desks, these involve final settlement procedures, meaning these securities were now locked for delivery, shifting focus to December coupons for future pricing. This routine transition can make it appear as though prices have dropped, but it actually reflects the "time value of money" loss, where back-month securities start accruing interest later than current-month securities. These rolls don't necessarily impact loan pricing immediately, as most lenders already incorporate anticipated back-month pricing adjustments into their rates weeks in advance. This periodic market reset helps maintain alignment between loan pricing and actual delivery timelines for MBS investments.
Here’s a breakdown:
Class A MBS: These are the first to settle each month, typically on the first business day. Class A includes MBS pools issued by Fannie Mae, Freddie Mac, and Ginnie Mae with 30-year fixed-rate mortgages. Due to their early settlement, they often have higher demand among investors aiming for quick settlement.
Class B MBS: These settle approximately one week after Class A, often on the second or third business day of the following week. Class B primarily includes 15-year fixed-rate mortgages and certain ARM (adjustable-rate mortgage) pools, giving investors options with shorter durations.
Class C MBS: These are the last to settle each month, typically two weeks after Class A, around the third or fourth business day. Class C pools often include additional ARM products and some specific-purpose MBS pools. The later settlement date can be useful for investors managing end-of-month or other timing-based strategies.
Each class allows investors to choose MBS that fit their specific timing and cash flow needs. This structured system also enables smoother trading and predictability in the TBA market, as investors know in advance when each class will settle.