What Are The Most-Common Mortgage Loan ARM Indexes?
There are several major indexes in wide use today. They include:
• The 11th District Cost of Funds Index (11th District COFI): This index reflects the interest levels paid for “deposit accounts” by savings institutions in Arizona, California, and Nevada that are members of the Federal Home Loan Bank of San Francisco. Deposit accounts include such things as checking and savings accounts, certificates of deposit and money market deposit accounts. In other words, the 11th District COFI mirrors lender costs. Since lenders like to keep costs low, this is an index where borrower and lender interests match. In general, this index tends to move slowly — good news when rates are rising, not so good when rates are falling.
• The 12-Month Moving Treasury Average (MTA): This is a 12-month “moving” average of U.S. Treasury securities adjusted to a one-year constant maturity. In other words, in January 2008 the MTA interest level might be based on the average rate for U.S. Treasury securities as they were priced from January 2007 to December 2007. In February 2007 the average would be based on rates from February 2006 through January 2007.
• The 1-Year Constant Maturity Treasury Rate (CMT): While the MTA is based on monthly averages, imagine if you made a graph which showed the movement of Treasury securities on a daily basis for a year. You could then take all the daily results and come up with an average that would change each day. This is how the “CMT” is calculated.
• The 6-Month London Interbank Offered Rate (LIBOR) According to the British Bankers’ Association, the LIBOR is the “rate of interest at which banks borrow funds from each other, in marketable size, in the London interbank market.” In other words, the LIBOR relates to European financial trends and is arguably the most-responsive to market changes, thus it’s the index most likely to reflect the highest or lowest rate, depending on which way the market is moving.
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