ARM INDEXES

ARM INDEXES

dreaming of new home There are many possible ARM (Adjustable Rate Mortgages) indexes. Each one has distinct market characteristics and fluctuates differently.

The most common indexes are:

CD: Certificates of Deposit
CMT: Constant Maturity Treasury
CODI: Cost of Deposit Index
COFI: 11^th District Cost of Funds Index
COSI: Cost of Savings Index
LIBOR: London Inter Bank Offering Rates
MTA: 12-Month Treasury Average

Certificates of Deposit (CD)

These indexes are averages of the secondary market interest rates on nationally traded Certificates of Deposit. The Certificates of Deposit (also known as CDs) is usually issued by banks and other financial institutions. They pay a fixed rate of interest for a specific period of time. The Certificates of Deposit of various maturities, including 1-Month, 3-Month, 6-Month and 1-Year, are used as ARM indexes. The 6-Month Certificate of Deposit (6-Mo CD) is the most popular of the CD indexes.

The CD indexes are very volatile and generally considered to react quickly to change in the market, which is good for you if rates are falling but not good for you if rates are rising.

Constant Maturity Treasury (CMT)

These indexes are the weekly or monthly average yields on U.S. Treasury securities adjusted to constant maturities. Yields on Treasury securities at "constant maturity" are interpolated by the U.S. Treasury from the daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

The CMT indexes are volatile and move with the market. They reflect the state of the economy, and respond quickly to economic changes. These indexes react more slowly than the CD Index, but more quickly than the COFI Index or the MTA index.

The CMT indexes are reported by the Federal Reserve Board.

Cost of Deposit Index (CODI)

The Certificate of Deposit Index (CODI) is the 12 month average of the monthly average yields on the nationally published 3-Month Certificate of Deposit rates. Information on monthly yields on 3-month certificates of deposit (secondary market) is published by the Federal Reserve Board. Lenders calculate the average by adding the 12 most recently published monthly yields together and dividing the result by 12.

Because this index is an annual average, it is much more steady than CMT and CD indexes which are very volatile and generally considered to react quickly to change in the market. The CODI and MTA indexes generally fluctuate slightly more than the 11th District COFI, although their movements track each other very closely. The MTA, COFI and CODI-indexed ARMs work much the same way.

11^th District Cost of Funds Index (COFI)

This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.

Since the largest part of the Cost of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good for you if rates are falling.

Cost of Savings Index (COSI)

This index is the weighted average of the rates of interest on the deposit accounts (sometimes called cost of savings) of the federally insured depository institution subsidiaries of Golden West Financial Corporation (GDW). All of the depository institution subsidiaries of Golden West Financial Corporation operate under the name World Savings.

World Savings receives money from consumers in the form of deposits and lends money as home or other loans. The interest rates in effect on these deposits are the basis for the COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month.

The COSI adjusts monthly and has a one-month reporting lag. It is computed on the last day of each calendar month and is announced on or near the last business day prior to the fifteenth day of the following calendar month.

The COSI index is a stable index. Historically, it is not as volatile as some other popular mortgage indexes, such as the one-month LIBOR index. It also tends to lag other mortgage indexes when it comes to adjusting to changes in interest rates.

Note: Since the merger of Wachovia and World Savings the Wachovia family of companies no longer uses the original COSI Index for new mortgages. The original COSI Index (a.k.a. GDW COSI or World Savings COSI) has been discontinued. The final COSI value {4.79} was released in September, 2007 for the month of August 2007. Starting from August 1, 2007 Wachovia offers the new Wachovia Cost of Savings Index. In October 2008 Wachovia discontinued providing updates to the new Wachovia Cost of Savings Index rate to the public. It is still being provided for existing customers though (until they are migrated over to a new index).

The Wells Fargo Cost of Savings Index is a new mortgage (ARM) index available through Wells Fargo. The index is based on the interest rates the depository subsidiaries of Wells Fargo & Company pay to individuals on certificates of deposit (CDs), also known as 'personal time deposits'. The index is calculated monthly and is based on the weighted average of all the interest rates paid on certificates of deposit held by individual depositors as of the last business day of each month. The Wells Fargo COSI includes both Wells Fargo and Wachovia certificates of deposit.

As personal time deposit rates tend to move more slowly than market interest rates in general, and because the W-COSI is composed of a portfolio of such deposits with different maturities, the Wells Fargo Cost of Savings Index lags when market rates move up or down. Since the W-COSI is more steady than the other popular indexes more closely tied to market interest rates, ARMs tied to this index are good for you if rates are rising (but not good if they are falling).

London Inter Bank Offering Rates (LIBOR)

London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euromarket in terms of volume.

The LIBOR is an international index, which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds. The LIBOR compares most closely to the 1-Year CMT index and is more open to quick and wide fluctuations than the COFI rate.

12-Month Treasury Average (MTA)

The Monthly Treasury Average, also known as 12-Month Moving Average Treasury index (MAT) is a relatively new ARM index. This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT. Because this index is an annual average, it is more steady than the 1-Year CMT index. The MTA and CODI indexes generally fluctuates slightly more than the 11th District COFI.

Deciding On An Index
If you're deciding which index is better you should understand that there probably is no such thing as a "good" index or a "bad" index. Each index has its advantages and drawbacks, and is used in different situations.

Freddie Mac and Fundamental Mortgage Market Indicators - updated daily