Key Mortgage Index Drops to Lowest Level in 10 Years

The 11th District cost of funds index, used extensively by lenders in California to set rates on adjustable-rate mortgages, fell in July to its lowest level in at least 10 years.

The fall in the index is good news for the many homeowners in California who bought their homes using ARMs. The index is the most common peg used by banks and thrifts in raising and lowering interest rates charged homeowners on their ARMS.

The index, which measures what savings institutions in California, Arizona and Nevada pay for money, fell to 6.998% from 7.115% in June. Lenders typically set ARMs at between 2 and 2.5 percentage points above the rate.

Economists and analysts have said the index drop in recent months reflects the overall drop in interest rates.

Typically, the index trails interest rates in general by several months, economists say.

The index, close to 9% in mid-1989, has dropped steadily over the past year. A year ago, it was more than 1.1 percentage points higher.

The index is now below 7% for the first time since the Federal Home Loan Bank of San Francisco began publishing it in July, 1981. Its highest level in the past 10 years was 12.673% in June, 1982.