How 11th District Index Works : Funds: Lenders in many states tie ARM rates to the most stable index published by the 12 regional home loan banks in the U.S.
If you’re like 6 million other homeowners in the United States, you have an adjustable-rate mortgage with an interest rate that rises and falls based on fluctuations in the 11th District Cost of Funds Index.
And if you’re like many of your fellow owners, you don’t have the faintest idea of what the index is or how it works.
“About a third of all ARMs across the country are linked to the 11th District Cost of Funds,” said Mike Wilson, an economist with the U.S. League of Savings Institutions.
“It’s arguably the most popular index in the nation, but most people don’t have an inkling about how it’s compiled or why it moves.”
The index is calculated each month by the Federal Home Loan Bank of San Francisco, a quasi-governmental agency that works to ensure that lenders have money for home loans in the Federal Home Loan Bank System’s 11th District--the states of California, Arizona and Nevada.
Lenders in many other states link their ARMs to the 11th District because it’s the most stable index published by any of the 12 regional home loan banks in the country.
The index reflects a composite rate that about 155 western savings and loans pay on savings and checking accounts, and other types of deposits.
Each month, the institutions belonging to the FHLB of San Francisco file detailed financial reports with the agency. Government analysts review the information to spot mistakes and then--with the help of computers--determine the composite rate.
A telephone hot line that announces the new rate is updated, and the lenders are informed by mail. The media is also contacted, and the new rate is printed in the next day’s newspaper.
The index doesn’t always walk in lock-step with movements in overall interest rates. Sometimes that’s good for borrowers; sometimes it’s not.
At the risk of oversimplifying matters, let’s say that all 155 or so lending institutions belonging to the FHLB of San Francisco had their money tied up in one-year certificates of deposit that paid 10%.
Even if rates plunged on other types of investment, such as Treasury bills or bonds, those western lenders would still have to pay 10% to their depositors until the year was up.
As a result, the 11th District rate would remain on the high side--and borrowers who had an ARM linked to the index would be stuck with their high payments until the CDs matured and the banks could lend out money at lower rates.
Conversely, say that rates on T-bills skyrocketed to 20%. The composite rate would remain at about 10%, and ARM borrowers wouldn’t get hit with huge increases in their monthly housing bills until the CDs matured and lenders had to raise rates to attract new deposits.
Of course, not all lenders pay the same rate on savings accounts and CDs, and their accounts mature at various times. But since the index measures the rates paid by so many institutions on so many accounts--and since each of those accounts will mature on different dates--the index isn’t subject to sharp swings.
The 11th District rate “usually lags movements in the overall market,” said Richard Nelson, chief economist for the FHLB of San Francisco.
“When overall rates are moving up, borrowers pegged to the cost-of-funds usually won’t see their rates go up as sharply as borrowers who, say, have their loans pegged to the one-year Treasury bill. That’s because Treasury bills are subject to fast swings, while the composite nature of the cost-of-funds index keeps it relatively stable.”
The drawback, of course, is that rates on ARMs linked to the cost-of-funds index move just as slowly when they’re going down as they do when they’re moving up. Even if interest rates on T-bills and other indicators plunge, the rate on your ARM would go down in tiny increments over several months.
While about one-third of the estimated 18 million ARMs in existence today are linked to the 11th District Cost of Funds, another third are pegged to the more volatile one-year T-bill.
The remaining 6 million mortgages are linked to more obscure indexes, such as the five-year Treasury Index or the National Mortgage Contract Rate.
Some lenders offer ARMs linked to only one type of index. Others allow customers to select the index they prefer. So if you’re shopping for an ARM today, which indicator do you choose?
“A lot depends on where you think interest rates are headed,” said Wilson, the economist at the U.S. League.
If you think rates will continue to drop, Wilson said, you might want to select an ARM that’s pegged to one-year Treasuries or the prime rate, because they react almost immediately to interest-rate swings.
Conversely, if you think that rates are heading higher--or if you simply can’t stomach the thought of having your future payments swing wildly--you’ll want to opt for the slow-moving cost-of-funds index or a similar indicator, such as the snail-paced five-year Treasury index.
Of course, with fixed-rate loans in the single-digit range, you’ll be excused if you shun the uncertainty of an ARM and choose a fixed mortgage loan instead.
“Rates on fixed loans are looking pretty good right now,” Wilson said. “Sometimes, the best answers to a borrower’s questions are the simplest ones.”
Letters and questions may be sent to Myers at the Real Estate section, Los Angeles Times, Times Mirror Square, Los Angeles 90053. Questions cannot be answered individually. MONTHLY WEIGHTED AVERAGE COST OF FUNDS 11th District Institutions January 1985 to November 1990
1985 1986 1987 1988 1989 1990 January 10.21% 8.770% 7.396% 7.615% 8.125% 8.369% February 10.160 8.964 7.448 7.647 8.346 8.403 March 9.976 8.744 7.314 7.509 8.423 8.258 April 9.872 8.587 7.245 7.519 8.648 8.211 May 9.704 8.441 7.223 7.497 8.797 8.171 June 9.565 8.374 7.274 7.618 8.923 8.086 July 9.365 8.196 7.275 7.593 8.844 8.109 August 9.273 8.018 7.277 7.659 8.763 8.075 September 9.129 7.901 7.394 7.847 8.807 8.091 October 9.027 7.717 7.444 7.828 8.643 8.050 November 9.036 7.602 7.562 7.914 8.595 8.044 December 8.867 7.509 7.645 8.022 8.476
AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of Jan. 25, 1991
Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.41% 9.73% 9.58% 7.67% 7.98% California 9.68 10.01 9.85 7.96 8.00 Connecticut 9.40 9.70 9.58 7.72 7.92 Wash. D.C. 9.29 9.64 9.48 7.21 7.60 Florida 9.41 9.80 9.62 7.71 8.02 Mass. 9.41 9.75 9.60 7.71 8.05 New Jersey 9.39 9.70 9.57 7.65 8.14 N.Y. Metro 9.47 9.77 9.64 7.74 8.10 New York 9.57 9.86 9.73 7.83 8.13 N.Y. Co-ops 9.71 10.03 9.95 8.09 8.50 Pa. 9.13 9.47 9.31 7.43 7.56 Texas 9.25 9.56 9.41 7.60 7.68 SOURCE: HSH Associates, Butler, N.J.
