Can You Time a Lock to Your Advantage?

May 30, 2011, Reviewed January 17, 2012

Home mortgage prices are based on the secondary market prices of mortgage-backed securities (MBSs), but changes in MBS prices seldom impact mortgage prices immediately. Typically, mortgage lenders set the prices they deliver to their loan officers and mortgage brokers in the morning, after markets open, and keep them unchanged through the day unless MBS changes during the day are large enough to justify the cost of another change.

The MBS market closes at 3pm EST. Mortgage borrowers who have been cleared to lock by their lender can do it between 3 and 5 EST, and sometimes even later. In principle, therefore, a borrower who knows what happened to MBS prices that day could judge whether mortgage prices the next morning would be higher or lower, and therefore whether they should lock then or wait another day.

Borrowers don’t have ready access to MBS prices, but I do, and I decided to provide a daily service, with the help of Jack Pritchard, advising borrowers whether or not to lock. We arranged to obtain the timely MBS prices we needed from Reuters, and planned to release the lock advisory daily at 3:05 EST. It would be a nice addition to my web site, I thought.

But first we had to test the premise that changes in MBS prices during the day predicted mortgage prices the following morning. To do that, we measured the difference between the opening and closing prices on MBSs during each of the previous 100 days, and compared the price changes to the mortgage rate change the following day. We did not expect a perfect correlation, because things happen that affect MBS prices after MBS markets close, but we did expect to find a statistically significant relationship.

In fact, we found no relationship at all. Even the largest intra-day MBS price changes did not predict whether mortgage rates would open higher or lower. For the 10 days with the largest MBS price decline, the subsequent mortgage rate changes were 5 increases and 5 declines. For the 10 days with the largest MBS price increases, the mortgage rate changes were 4 increases and 6 declines. We struck out.

In previous articles on locking the price of a mortgage, I have encouraged borrowers to lock ASAP, on the grounds that 1) borrowers can’t predict future interest rates, and 2) locking ASAP may prevent larcenous behavior by the lender. See Should You Lock ASAP? That advice still stands.

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