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For current values of these and other indices, look here.

Index:   National Average Mortgage Contract Interest Rate for Major Lenders on the Purchase of Previously-Occupied (Single-Family) Homes.
Short name: National Mortgage Contract Rate (NMCR)
Source:   Federal Housing Finance Board (for a time, it was released by the Office of Thrift Supervision and originally, the Federal Home Loan Bank Board)
Commonly used on:   One-year ARMs.

The NMCR is a national average of mortgage rates, and reflects the interest rate of all new single-family purchase-money mortgages closed during the last five business day of the month. The NMCR reflects only the rate; it does not include points, application fees, and similar charges.

The NMCR includes conventional (long term, fixed rate), balloon (short term, fixed rate) and adjustable rate mortgages. Thus, the NMCR tends to be lower than the average of only fixed rate loans, and higher than the average of only adjustable rate loans. By its nature, the NMCR tracks market rates and is directly related to the primary mortgage market. However, it lags behind the state of the economy.

Since the NMCR reflects the average interest rate of all loans closed, it tends to be considerably higher than most other ARM indices. Most lenders, therefore, add little if any additional margin to this index.

Historical note: the NMCR was index mandated for use on the early 1980s Renegotiable Rate Mortgage (RRM), which was (along with the Variable Rate Mortgage, or VRM) one of the earliest type of adjustable rate mortgage.


Index:   Auction Average of the (One-, Three-) or Six- Month US Treasury Bill
Short name: Auction Averages of Treasury Bills
Also known as: __ Month Treasury Bill (T-Bill)
Source: Bureau of Public Debt (formerly reported by the Federal Reserve in Publication H.15)
Commonly used on:   Three- and Six-Month ARMs.

Treasury Bills, like other marketable Treasury securities, are debt obligations of the U.S. Government and are backed by the Government's full faith and credit. A bill is a short-term investment issued for a year or less. Investors buy bills at a discount from par (or "face") value. The difference between the purchase price and what the investor receives at maturity is interest.

4-week bills (sometimes called one-month bills) are auctioned once a week, usually on Tuesday. 13-week ("three-month") bills and 26-week ("six-month") bills are auctioned once a week, usually on Monday.

There have been a lot of values for Treasury Bills used as ARM indexes over the years. For example, most early 3- and 6-month ARMs were originally tied to the Auction Average for the 3- or 6-month Bill.

There was also a Secondary Market yield (tradeable bills with face values of $100,000 or more) which was infrequently used to govern some ARMs, as well.

Mortgage holders and servicers alike frequently got tripped up finding and employing the correct values for their ARMs. Confusing things a bit more was that after November 8, 1998 there was no longer an Auction Average reported by the Federal Reserve, but rather an "Auction High" value, instead... which was subsequently dropped from reporting in July 2000.

In addition to those was also a value called "Auction Average for Investment" (also known as the "Bond Equivalent Yield") which was sometimes used for ARMs. This series was discontinued May 8, 1995 in favor of reporting a new 3- and 6-month Treasury Constant Maturity value (see below for T-Sec info) which is being used for some ARMs today.

Then, there's the story of the "One-year Treasury Bill".

The Treasury used to auction off a 52-week Treasury Bill (also known as the one-year Treasury Bill). Issuance of the 52-week bill was discontinued after August 29, 2000.

To date, the term "One-year Treasury Bill" still causes confusion. Many people in and reporting on the mortgage industry wrongly use the phrase 'T-Bill' when they really mean 'T-Sec' or TCM (see below). The One-year Treasury Bill (52-week bill) was almost never used as an ARM index.

The 52-week bill was auctioned only once per month, and therefore only ever had a monthly value (one of the key ways to differentiate the Bill from the TCM). There has never been a "weekly average of the 1-year T-Bill" so it cannot have ever been an ARM index... but it is a strong indication that you should read always your mortgage contract carefully, as what's been explained to you might not be as accurate as you think.

Margins added to T-Bill based ARMs usually run 2% to 3%.


Index:   Yield on Treasury Security Adjusted to a Constant Maturity of ___ Year(s)
Short name: ? Year Treasury Security (T-Sec)
Also known as: CMT (Constant Maturity of the Treasury); TCM (Treasury Constant Maturity); T-Sec (Treasury Security)
Commonly used on:  One-year ARMs and non-fixed portion of Hybrid ARMs.

As mentioned above, Treasury Bills and Securities are auctioned by the Federal Reserve Board. "Bills" mature in one year or less; "Securities" mature in terms of from one to thirty years.

Treasury Constant Maturities aren't actual physical investments. They are plotted out mathematically by producing a graph called the "Yield Curve", which is a method of evaluating all outstanding Treasuries' due dates and values to produce a given yield for a given term, even if no security actually exists for that term.

By way of example, the value for the one-year TCM will include the yields for a 30-year T-Bond issued 29 years ago, those for ten-year T-Notes issues nine years ago and a those for Two-year Treasury securities issued a year ago (as well as any other securities with just a year remaining to maturity). All technically mature in one year, so they are included in the calculation.

When lenders refer to one-, two-, three- or five-year Treasury securities as an ARM index, they are referring to its constant maturity. Treasury constant maturity values are calculated on a daily, weekly and monthly basis.

Treasury bills and securities reflect the state of the economy, Fed policy, inflationary pressures and respond fairly rapidly to economic changes. That propensity to change rapidly means that Treasuries can be among the most volatile of indexes (which can work for as well as against you).

A margin -- generally between 2% and 3% -- is usually added to Treasury bill and security rates by the lender to arrive at a newly-adjusted interest rate.


Index:   12-month moving average of monthly values of the one-year TCM.
Also known as: 12-MAT; 12-MTA; Moving Treasury Average
Source:  Raw data, Federal Reserve; calculation, individual lenders.
Commonly used on:   One-month ARMs (possibly some 3- and 6-month ARMs; could also be used on a one-year ARM).

A contrived index produced by statistically averaging the 12 previous monthly averages of the One-Year Treasury Constant Maturity.

How to make a Treasury-based ARM less volatile (more appealing to borrowers), but have it perform like a LIBOR- or COFI-based product? Soften the spiky nature of the index by smoothing it out over time.

To produce the MTA, the last twelve monthly values of the one-year TCM are added together, and the sum is then divided by 12 to arrive at this month's value.

As there's no official source for this final output data, no specific history is available. As well, we have heard of lenders creating their own "moving index" value by adding the last 52 weeks of weekly values together, then dividing by 12 to arrive at a new (although slightly different) MTA value to adjust their ARMs.

MTA-based ARMs usually have a margin of 2%-3% added.


Modern Index:     Certificates of Deposit Index (CODI)

The average of the 12 most recent monthly yields on 3-month Certificates of Deposit (Secondary Market) as published by the Federal Reserve.

This index is akin to the MTA (above); it is a twelve month moving average (last twelve values added together, the divided by 12 to arrive at this month's value).

Typically used on monthly ARMs.

CODI-based ARMs usually have a margin of 2%-3% added.


Modern Index:   Federal Cost of Funds
Index:  same.
Source:   Federal Home Loan Mortgage Corp. (Freddie Mac)

The Federal Cost of Funds Index (Fed COFI) is used as a benchmark for some types of mortgage loans and securities. It is calculated as the sum of the monthly average interest rates for marketable Treasury bills and for marketable Treasury notes, divided by two, and rounded to three decimal places.

Freddie Mac doesn't define exactly which "marketable Treasury bills and marketable Treasury notes" are included in its calculations, or whether or not they follow a calendar month, utilize weighted averages or other information.

The Federal COFI is made available by Freddie Mac on or about the 20th day of each month. Freddie Mac first began publicly providing the Federal COFI in March, 1991; values are calculated for earlier years to illustrate what the index values would have been for those periods and are provided for research purposes only. The Federal COFI is not adjusted to reflect subsequent changes in the underlying Treasury rates once the value has been posted.

Fed COFI-based ARMs usually have a margin of 2%-3% added.


Modern Index:  OTS 11th District COF, also called COFI (pronounced "Coffee")
Index:   Monthly Weighted Average Cost of Funds for 11th District SAIF-Insured Institutions
Source:   Office of Thrift Supervision, San Francisco
Commonly used on:  One-Month ARMs.

This index is calculated by the Federal Home Loan Bank of San Francisco, one of twelve Federal Home Loan Banks. The 11th district represents the SAIF-insured savings institutions (savings & loans and savings banks) in Arizona, California and Nevada.

The cost of funds reflects the interest which these institutions pay on their sources of mortgage money, including savings accounts, FHLB advances, money borrowed from commercial banks, and other sources.

Since the largest part of a cost of funds index is interest paid on savings accounts, this index may lag behind the economy; many accounts are time deposits with medium- to long-term maturities at fixed interest rates.

This index is considered to be one of the most stable indexes available because it's a lagging indicator: changes in financial markets may not be fully reflected here for months after an event or new trend has appeared. That can be both good and bad; loans tied to the COFI will rise more slowly than those tied to more volatile indexes, but will fall more slowly than other market interest rates.

Most COFI ARMs have no per-adjustment interest rate caps (they would rarely need one) but they can feature an annual payment cap, typically 7.5% (your payment would rise no more than 7.5% from year to year, regardless of what happens to interest rates). However, some COFI-based ARMs allow for negative amortization, so caution might be needed when selecting one in the face of a rising interest rate environment.

The Eleventh District is one of 12 such districts. Most other districts calculate their own COF, which lenders may use as an index.

Lenders generally add a margin, between 2% and 3%, to this index.


Cost of Savings Index (COSI)
Index:  Golden West Financial Corporation's Cost of Savings Index
Source:   Golden West Financial Corp.
Commonly used on:  One-Month ARMs, specifically those originated directly (or through brokers) by World Savings Bank.

In the early days of ARMs, regulations were written which prohibited a lender from tying ARMs they originated to their own cost of funds, and were required to use an index beyond their direct control.

For some lenders, that meant utilizing an index which was too out of line with their business costs, or not volatile enough for their requirements.

Golden West Financial solved at least their own problems by becoming the lender of record for a product originated by World Savings, which is a wholly-owned independent subsidiary of Golden West.

World Savings takes deposits and lends money, as other lenders do. The interest rates in effect on the deposited funds 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.

This particular cost of funds index directly reflects the interest which World Savings pays for their sources of at least some of their mortgage money. In effect, Golden West has tied their ARMs _almost_ directly to their cost of attracting money to lend for mortgages.

Since the largest part of a cost of funds index is interest paid on savings accounts, this index may lag behind the economy; many accounts are time deposits with medium- to long-term maturities at fixed interest rates.

Similar to a COFI, this index is considered to be very stable because it's a lagging indicator: changes in financial markets may not be fully reflected here for months after an event or new trend has appeared. That can be both good and bad; loans tied to the COSI will rise more slowly than those tied to more volatile indexes, but may remain "high" while other market interest rates decline more quickly.

COSI ARMs, like other monthly ARMs, frequently have no per-adjustment interest rate caps (they would rarely need one) but they can feature an annual payment cap, typically 7.5% (your payment amount would rise no more than 7.5% from year to year, regardless of what happens to interest rates). However, some COSI-based ARMs allow for negative amortization, so caution might be needed when selecting one in the face of a rising interest rate environment.

World Savings generally adds a margin, between 2% and 3%, to this index.


LIBOR ("lye-bor")
Index:   London Interbank Offered Rate
Sources:  British Bankers Association (BBA); Wall Street Journal; Federal National Mortgage Association (Fannie Mae)
Commonly used on:  One-Month ARMs (monthly values); one-year ARMs and non-fixed portion of Hybrid ARMs.

LIBOR ranks among the most widely-used yet least-understood ARM indexes.

According to the British Bankers Association (BBA), the BBA LIBOR is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. In this way, LIBOR is akin to our own Federal Funds rate, also a sort of interbank lending rate.

Essentially, it's an open market rate, free of regulatory influence. The US' Federal Funds rate is also a market-defined rate, but has a "target" level provided by the Fed (the stated, "official" Fed Funds rate) to which banks should adhere for the most part. However, they can certainly charge each other more for overnight funds if they should see fit, but probably not less.

The two 'flavors' of LIBOR are these:

  • BBA LIBOR:daily (each British business day), the BBA produces a set of values for periods of one to twelve months. Many publications report the one, three, six and twelve month values. The most well-known of these is The Wall Street Journal.
  • FNMA LIBOR: monthly (second to last business day), Fannie Mae releases a set of monthly values for one, three, six and twelve months, and a moving, last-12-month average for LIBOR (FNMA LIBOR). These do not use the BBA's LIBOR figures, but use the same base numbers for their calculations.
  • A mortgage may be tied to any one of those, or to some (currently-non-existent) weekly or monthly value contrived from a set of daily numbers.

    Most mortgages eligible to be sold to Fannie Mae and Freddie Mac utilize the LIBOR published in the Wall Street Journal. [???] Where other loans may use a weekly or monthly value to govern them, these products use a given daily value to determine their new price. In the case of an ARM with monthly adjustments, the value for the one-month LIBOR is typically used, with the most recent Index figure available as of the date 15 days before each Interest Rate Change Date becoming the "Current Index."

    In the case of an ARM with an annual interest rate adjustment, the twelve-month (aka one-year) LIBOR is used, with the most recent Index figure available as of the date 45 days before each Interest Rate Change Date becoming the "Current Index."

    However, Fannie also buys loans tied to its own LIBOR - but at this writing, it appears that this is only the case with ARMs featuring adjustments every six months. They use their own six-month LIBOR "as posted by Fannie Mae through electronic transmission or by telephone or both through electronic transmission and by telephone." Again, the most recent Index figure available as of the date 45 days before each Change Date is referred to as the "Current Index."

    If you're interested in a "LIBOR ARM", you'll want to find out exactly which LIBOR it's tied to before you sign, just to eliminate confusion, if nothing else.

    LIBOR is a fairly volatile index and reacts to a variety of influences. Its movements are most closely associated with those of six-month CDs, but also have been likened to the US Federal Funds Rate. However, as many products linked to it utilize a monthly adjustment period, it may be less volatile on a month-to-month basis but could be more volatile when comparing year-over-year (or year-to-year) values of LIBOR versus other indices.

    Currently, margins added to LIBOR ARMs vary widely (along with the products they governs) but may be found from 1% to 3%.


    Prime Rate
    Index: Prime Lending Rate; Bank Prime Loan
    Source:   Wall Street Journal; Individual lenders; Federal Reserve

    Every lender has its own prime rate, which is typically (but not always) defined as a preferred interest rate charged to their 'prime' business borrowers. The "official" Prime Rate quoted as an index is defined by The Wall Street Journal (WSJ) as "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks." It is not the 'best' rate offered by banks. A 'Bank Prime Rate' is also reported by the Federal Reserve.

    Most lenders use the print edition of the WSJ as the official source of the Prime Rate. Most lenders specify this as their source of this index. There may be cases in which a lender may use another lender's prime rate as a loan index.

    Since Federal law prohibits lenders from using an index they directly control (such as their own prime rate) as a loan index, this is legal, but it does mean that it can make tracking the index value and changes more difficult then one tied to a publicly-available source.

    No central agency sets the Prime Rate, but the Prime Rate is very much influenced by moves in the Federal Funds rate. In recent times, that has become a lockstep relationship, more or less.

    The Prime Rate does not change at regular intervals. It changes only when the nation's "largest banks" decide on the need to raise, or lower, their "base rate." The prime rate may not change for years, but it has also changed several times in a single year.

    It is most commonly used on Home Equity Lines of Credit, but some mortgages are also tied to Prime. Such products feature a margin which ranges from a negative number (such as Prime -1%) to as much as Prime + 4%.


    Required Net Yield, RNY
    Index:  Required Net Yield
    Source:  Federal National Mortgage Association (Fannie Mae); Federal Home Loan Mortgage Corporation (Freddie Mac)

    A Required Net Yield may be roughly defined as the minimum yield price that Fannie Mae / Freddie Mac is willing to accept when it buys a 'closed' (originated) loan from lenders. It may be thought of as a 'wholesale' price for lenders.

    There are several "required net yield" figures available for a given mortgage type, including 30-year fixed rate mortgages. You will need to check your mortgage documents for the precise figure you need, but the most commonly used RNYs include the "60-day" and the "90-day" RNY for the 30-year fixed rate mortgage.

    RNYs are a current price level indicator for fixed rate mortgages. While not technically an ARM index, they are the basis for converting certain 'convertible' (mostly one-year) ARMs into fixed-rate mortgages. Most conversion options utilize the current RNY value for a 60-day mandatory commitment, plus a markup (margin) of three-eighths percent (.375%); the sum of the two, rounded to the nearest one-eighth percent (.125%) becomes your new interest rate for the fixed rate portion of your loan.

    There are RNY values available on a daily basis for a number of products and for a range of commitment periods (10 day, 30 day, 45 day, 60 day, 90 day, etc.). Some change more than once per day.

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