Why Some Mortgage Rates Aren’t Down
QUESTION: I have an adjustable-rate mortgage tied to the 11th District cost of funds. Recently I have been reading about the drop in interest rates by the big lenders, supposedly causing a corresponding drop in adjustable mortgage rates. However, the 11th District cost of funds has not been declining. Can you explain why?--R. B.
ANSWER: You are not the only homeowner wondering about this matter these days. Since the early 1980s, when adjustable-rate mortgages became common, the otherwise esoteric 11th District cost of funds index has come under a lot of scrutiny whenever interest rates have dropped and the index hasn’t.
To understand why this is possible, you have to understand what the index is and how it operates. The index is the weighted average cost of all funds deposited into savings institutions in the 11th District of the Federal Home Loan Bank, a territory that covers California, Arizona and Nevada.
Among the funds tracked are those in savings, checking and money market accounts, certificates of deposit and other bank instruments. The interest rates on all these accounts are averaged to determine the index, a figure that represents the interest rate, or “cost of funds,” that the savings institutions actually had to pay their customers to attract the money they now have available to lend.
The district computes the index rate monthly and publishes the figure for a particular month on the final working day of the following month. The rate for June, 1989, announced last Monday, was 8.923%. Adjustable-rate mortgages typically run about two to three points higher than the index, a difference designed to cover the lenders’ overhead costs and profit margins.
Because the index includes both long- and short-term borrowings, it is considered far less volatile than other measures of the cost of money. For example, an analysis prepared for Great Western Savings shows that in August, 1981, when the prime rate nearly reached 21%, the interest rates being paid on 12-month Treasury bills exceeded 16%. But the 11th District index reached only 12.029%.
However, just as the 11th District index rises more slowly than other indexes, it falls more slowly as well. Lenders estimate that it typically lags from two to three months behind the one-year interest rates being paid to purchasers of 12-month U.S. Treasury bills.
Rates on 12-month Treasury bills have gradually been falling since April, as have other key interest rates, most notably the prime rate. (This latter rate is the interest that banks charge their largest and most credit-worthy customers.) However, over the same time span, the 11th District cost of funds index has risen.
Why? Because late last year and during the first four months of this year, interest rates were rising, and the 11th District index is just now catching up with that earlier rise. Lenders say the 11th District cost of funds index should begin to drop over the next few months.
The current 11th District rate is available on a taped telephone message to California callers at (800) 824-6560. A brochure on the subject is available from the Federal Home Loan Bank of San Francisco, Communications Department, P.O. Box 7948, San Francisco, Calif. 94120.
Finding Value in ‘Worthless’ Stocks
Q: Can you please comment on stock certificates that are known to have no value except as antiques or collectibles? I am specifically thinking about the certificates of such companies as Dusenberg and Durant, two former auto makers that have long since gone out of business. Are their stock certificates worth anything to collectors?--W. E. D.
A: In a word: yes.
Our advisers say interest in old stock certificates is gradually increasing among collectors who believe that these documents have both a historical and an aesthetic value. Europeans are said to be among the primary buyers of the old certificates at this time, but some brokers predict that the hobby could become as popular as stamp collecting.
The actual price that these certificates command on the market is quite another matter, but getting a quote should not be terribly difficult. Our advisers say several reputable dealers can tell you what they would be willing to pay for the certificates. When seeking a quote, you should send a photocopy of the certificates along with your name, address and a stamped, self-addressed envelope for a reply. Never, ever, send the actual certificates. You may never see them again.
Among the brokers dealing in antique stock certificates are R. M. Smythe & Co., 24 Broadway, New York, N.Y. 10004, and George LaBarre Galleries, P.O. Box 746, Hollis, N.H. 03051.
Does a Pension Reduce Social Security Checks?
Q: I receive monthly payments from a private pension fund. Am I entitled to benefits from my husband’s Social Security account as well? My pension exceeds what I would get on his account. I’ve asked several different people about this and have received several different answers. It’s all too confusing for my poor addled brain!--T. S.
A: This is really quite a simple matter, and the answer is sure not to boggle.
Your private pension, whatever its amount, has absolutely nothing whatsoever to do with your eligibility to collect Social Security on your husband’s account. What counts is whether you are eligible as a wage earner to collect Social Security on your own behalf.
If you did not contribute to Social Security and are not entitled to collect anything on your own account, then you would be eligible to draw on your husband’s benefits as a spouse (or widow).
If you are entitled to your own Social Security, then your ability to collect on your husband’s account is limited. In this case, you would be able to draw spousal benefits on your husband’s account only if your own benefits were less than half the benefits to which he is entitled. Social Security regulations limit you to picking whichever benefit account gives you the larger payment. But you may not draw on both accounts.
See, it’s not all that confusing.
