INTRODUCTION TO COST OF FUNDS INDEX (COFI INDEX)

The goal of the COFI loan is to provide our clients with a mortgage that gives you more options than the traditional mortgage. It offers homeowners options that will allow them to invest more each month, pay off debt, or simply build equity faster. COFI also has extra features which helps resale and provides added security. COFI is tied to the most conservative index which means you can rest assured that your mortgage will be affordable. The COFI loan has the lowest foreclosure rate of any loan in the country!

A COFI LOAN COULD CUT YOUR MORTGAGE PAYMENT IN HALF!

In this volatile interest rate environment, the Cost of Funds Index (COFI) loan has grown in popularity for several types of borrowers. The COFI is perfect for people wanting to get the lowest possible payment, while at the same time pay less in interest over the life of the loan and shorten their mortgage term.

The beginning interest rate on the COFI loan starts as low as 3.50%

The initial rate of interest varies from borrower to borrower depending on things such as credit rating, property type and property location. The main features and benefits to the COFI are:

Initial rate as low as 3.50% 40-Year mortgage term available COFI is convertible to a fixed rate Equity Builder Bi-Weekly option 5% down with NO PMI on purchases Payment Options COFI loan is assumable 10% down with NO INCOME verification Portfolio loan. Loan is not sold Less paperwork and conditions

Saves hundreds of dollars a month on your mortgage. Lowers monthly payment. Peace of mind of a fixed rate when the market calms down Pays off house 7 to 10 years faster. Saves $$ in interest! Lowers down payment. Gives extra tax deduction Monthly savings can be invested or pay off credit cards. More attractive than a new loan. You sell faster. Self-Employed or Business owner finally have an easy loan. No confusion. Payment goes to (1) lender for life of loan. Your loan will close faster. Saves you time and money.

What is the 11th District Cost of Funds Index?

The Federal Home Loan Bank (FHLB) System is comprised of 12 Districts, each of which has its own District Bank-The 11th District is based in San Francisco and includes member savings institutions from Arizona, California and Nevada.

The 11th District COFI was introduced in 1981 and represents the weighted average cost of all funds for savings institutions eligible to be members of the 11th District. The source of these funds includes savings and checking accounts, money market accounts, short term CD accounts, advances by the FHLB District Bank, and other borrowed money.

The latest statistics released by the Federal Home Loan Bank Board (FHLBB) show the following approximations:

60% of deposits are in Checking and Savings accounts 30% of deposits are in the 6 month and 1 year CDs 10% of deposits are in 2 to 5 year CDs

The index represents a weighted average cost of funds and includes long-term accounts-The 11th District COFI is popular with both thrift lenders and borrowers because the index adjusts slowly and stays consistent with those lenders' costs. The most recent index value may be obtained by calling the FHLB Hot line for the 11th District COFI at (415) 616-2600 or by checking the money section of your USA Today.

What is an ARM?

The Cost of Funds Index is an ARM. ARM stands for "Adjustable Rate Mortgage." The interest rate for an ARM is determined by adding an index to a margin.

An index follows the overall condition of the economy and is a measurement of the relative "cost of funds" at any given time. Some examples of different indexes are:

The Wall Street Journal Prime Rate The weekly average yield on U.S. Treasury Bills The London Inter-Bank offered Rate (LIBOR) The 11th District Cost of Funds Index (COFI)

A margin is a predetermined amount that is added to an index value in order to arrive at an interest rate.

INDEX + MARGIN=INTEREST RATE (%)

This is also referred to as the "Fully Indexed Rate." For example, if the index value=4.9% and the margin=2.75%, then your interest rate would be 7.65%. Please note that the margin value will never change. The only thing that could adjust is the index value. Most all ARMS have what is called a "teaser rate" which is a start rate that is below its fully indexed rate. The way your payment and/or interest rate adjusts after the initial rate depends upon the CAPS of your loan.

The less volatile your index, the more stable your interest rate and payment! The most important feature of an ARM is the index used. The more stable the index, the more stable your payment.

The Kiplinger Washington Letter stated this about the COFI index: "Good idea to understand the index used. One of the most stable (ARM indices) is the 11th District Cost of Funds Index, linked to thrifts mostly in Calif. Others fluctuate more quickly, such as six-month and one-year Treasuries."

What determines an adjustment?

CAPS

Life Caps-A life cap is the maximum rate of interest that can be charged for a particular ARM loan. Every ARM must have a life is determined when the loan is made. The typical life cap for a COFI loan is 11.95%.

Adjustment Caps-An adjustment cap is a limit on the amount the interest rate can change at any one time. The frequency of the adjustment will be determined when the loan is made. A common adjustment cap is 2% with a one year frequency. Generally speaking, the COFI loan does not have an adjustment cap. The slow moving nature of the COFI does not warrant an interest rate cap. COFI loans mostly have payment caps.

Payment Caps-A payment cap is a limit on the amount that a payment may change at each adjustment. This type of cap is often expressed in terms of a percentage that the amount of a payment may change. The COFI has a payment cap of 7.5%. For example, if you were borrowing $200,000 and your start rate was 3.50%, your monthly payment would be the following given a worst case scenario.

$200,000 loan:  3.50% start rate-30-Year term
Year 1:	$ 900.89
Year 2:	$ 968.46
Year 3:	1,041.09
Year 4:	1,119.17
Year 5:	1,203.11

Note the gradual increase on the COFI loan payment. The payment cap is 7.5% each year. Remember, the cap is based on the payment, not the interest rate. The next year payment is calculated by adding 7.5% to the current payment. (i.e. Year 1, $900.89 x 7.5%=$67.57. Next year payment would be $900.89 + $67.57=$968.46.) The same thing is done each year thereafter.

Why is COFI so stable?

History of COFI

In 1977, Congress thought it would be a bright idea to deregulate the banking industry, resulting in a rash of speculative lending practices. Among these were wholesale investment in junk bonds, foreign governments and many varieties of commercial real estate ventures. These investments yielded high returns but were of very high risk.

Banks were taking our money and investing it. Due to the liberal banking laws, little banks were popping up all over the place competing for our money. This competition drove the banks cost of funds up. They didn't really care though! They were happy to take our money so they could invest it elsewhere for a higher return. This caused a myriad of problems as people jumped out of the equity markets and into banks. Bank deposits are FDIC insured and gave higher comfort to the general public. As a result of all this, the 11th District Cost of Funds Index increased as the banking industry jumped down the path of no return.

In 1989, Congress got a hold of themselves and re-regulated the banking industry with the passing of a law called FIRREA (Federal Institutions Reform Recovery Enforcement Act.) The government also created an entity call the RTC whose job description included the liquidation of the failing banks and S&LS. There are now few high cost thrifts and funds and no competition between the banks. Less competition means banks are going to pay us less for our money. Less competition means COFI drops!

Banks are now unable to invest in the same avenues as before due to strict regulation. The FDIC keeps these rates from going too high.

COFI is an average

The COFI is a weighted average of approximately $350 billion in assets. Because it is an average, it doesn't move very fast. This protects the interest rate of a COFI loan from fluctuating quickly.

COFI does not move with other indexes

The Cost of Funds Index loan is not market dependent. In 1994, the Federal Reserve raised rates (7) times. This resulted in the Prime Rate, one year T-Bill and other indexes going up over 3% in a one year period. COFI stays low because it is the cost for a bank to do business!

Stable, Predictable Index!

Compare:

Deposit Rates 4% Checking 7% Savings 10% 1 Year CDs 13% 3 Year CDs 15% 5 Year CDs 1980's Savings & Loan Industry De-Regulation! Junk Bonds (18% Return) Foreign Governments (High Risk) Commercial Real Estate Speculation (High Risk) $450 Billion S&L Bailout! Taxpayers will pay for 40 years! vs.   Deposit Rates 2% Checking 2-3% Savings 4% 6mo to 1 year CDs 4.5 - 5% 2 to 5 year CDs 1990's Savings & Loan Industry Strict Re-Regulation Junk Bonds Illegal Foreign Governments Illegal Commercial Real Estate OUT! FDIC Audits (Micro-analysis) XXXXXXXXXXXXXXXX

Banks now making SAFE HOME LOANS!!!

The COFI makes Sense!!

New deposits enter at today's low 1-2% deposit rates The average Cost of Funds has declined below 4% Older, higher deposits, drain out of the average

Mechanics of COFI

You pay ONLY at your starting interest rate, as low as 3.50%, which is a fixed monthly payment for the first year. After year #1, you have the following payment options each year.

You can convert to a fixed rate. It's $200 and a phone call. (Normally, people don't convert COFI loans as it would mean a rise in payment!) You may take your maximum payment increase, 7.5% of the previous years payment, and that payment is then fixed for one year. (See previous example of payment caps.)

Special Note: The principal balance of your COFI loan can go up and down depending on your payment rate and index fluctuation. When the monthly payment is more than sufficient to pay the full amount of interest due, the lender subtracts the amount that exceeds the interest due and applies it to principal. If your total payment doesn't cover the total amount of interest due for a particular month, then the difference is then added to the outstanding principal at your option. .

The payment at 3.50% is called your minimum payment. If you stay at your minimum payment, you will defer interest. Probably the most exciting feature of this COFI loan is the deferred interest option. Basically, what we have in a COFI loan is a loan with an interest rate at around 6.79% with the option to pay at 3.50%. The ability to choose to defer your interest, paying at the lower amount frees up hundreds of dollars a month. The monthly savings can be used to invest, pay off higher interest rate debt or simply apply towards the principal to pay off the loan faster. You never have to have deferred interest. It is your option. Even if you do choose to defer interest, your COFI loan still pays off in 30 years, or around 23 years if done bi-weekly. This is the main reason people love this loan. One may use wisely the cash-flow offered and still pay of their loan early.

A COFI loan is a very conservative loan is today's market. It's payment cap assures that your loan will always be affordable.

You save a ton in first year payments. You may convert to a fixed rate when the market settles down. You avoid risk of a high fixed rate if currency devaluation occurs. 'Low doc' or 'no doc' easy-qualifier way to get a low fixed rate. No fee collected with the application. *On selected products. No impounds (escrows) required for fire or taxes. There is no fee to waive such escrows. No transfer of your mortgage for the life of your loan (your loan won't be sold!) Common sense underwriting - no FICO scores used.

Who needs COFI???

Self Employed / Small Business Owner

No-Income, No-Asset verification		No gathering of documents, easy qualifying
3.50% Start Rate		Pay off business debt, save money for investing
Payment Options		Helps cash flow cycles
80% Cash Out and Cash Out on Rentals		Allows liquidation
No Escrows Required		Improves cash flow

Young family

Low Payment Options		Important as household income varies and family grows
3.50% Start Rate		Helps start investment fund / Pay of credit cards, student loans
33/40 qualifying ratios		Helps qualify for more home
Assumable		Excellent marketing feature as you need to "move up"
Equity Builder		True Bi-Weekly allows rapid growth to move up
Equity Builder		Allows for debt free home by college

Retired / Fixed Income

Payment Options for cash flow security		Pay as 15 year, fall back to 30 year if necessary
Stable Index		Moves similarly to pension / CD income
Equity Builder		Bi-Weekly allows borrower to be debt free

Military

Assumable		Marketing advantage for future moves
3.50% Payment Option		Frees up cash for investments / pay off credit cards
Choices		Payments, Escrows, Term, Amortization

Highly Sophisticated Borrower/Contractor/Engineer/Small Stock Investor

Stability of Index		Historical Pattern
Payment Options		Unique manipulation of loan
Escrows Optional		Gives you control of your money and not the lender
Equity Builder Option		Pay off loan 7 to 10 years faster
3.50% Payment Option		Invest savings, interest tax deductible, make more in market

Little known facts about COFI

COFI has a foreclosure rate of less than 1%, the lowest in the country Only 3 times in history has the COFI risen more than 1% in a one year period Historically the COFI has been between 3.5% - 5%. COFI loans are now convertible to a fixed rate! COFI at its worst case increase for 7 years still has a lower payment than today's fixed rate. More than half of the deposits in the 11th District are held by 4 institutions. Not one COFI loan has reached its life time cap. No time in history has a COFI loan cost a borrower more money than a fixed rate. Research over a 10 year period from 1981 to 1991 provided by First Boston concluded that people who took out adjustable rate mortgages saved an average of 25% in interest costs as compared to a fixed. COFI goes down faster than it goes up. COFI has more potential for rapid amortization than deferred interest over the life of the loan.