From: KL7 
Newsgroups: misc.invest.real-estate
Subject: Re: Prime Rate
Date: Mon, 12 Apr 2004 15:53:02 +0000 (UTC)

Our distinguished colleague, "relo" scribed:

>The prime rate is just a benchmark lending rate (currently 4.00%).
>Another benchmark lending rate is Brokers' Loan (aka Call Money)
>(currently 2.75%). Banks make good money on both. Current cost of funds
>for banks approximates the current Fed Funds rate of 1.00%.
>There are some banks (Citizens Bank in PA for one) that offer HELOCs as
>low as prime - 1.01% = 2.99% and no or minimal fees. I assure you they
>make money.


Just to add some information to the soup, the Prime rate in recent times
has moved _in tandem_ with the Fed Funds rate, and at exactly 3% higher 
than the Fed Funds rate.  This can be seen from the St. Louis Federal
Reserve Bank website.

http://research.stlouisfed.org/fred2/data/PRIME.txt

To understand how incredibly profitable the situation
has become for lenders, consider that today a 1% Fed Funds vs. 4% Prime 
converts to a nominal TRIPLING of roi.  Example: $3 mil loan costs
the lender $30,000; pays $120,000; gain = $90,000.

For a more "reasonable" 3% Fed Funds vs. 6% Prime, a $1 mil loan costs
again $30,000 (same investment); pays $60,000; gain = $30,000.

Holy Greenspike, a mere 2% rise in the prime in this case causes a 
nominal -67% decrease in lending profits.  But for the time being,
it's heck of a party going on -- milk baths, champagne from ladies
slippers, cigars lit from $100 bills.  What am I reminded of?  I can't
quite place it.  Oh well. 

-- 
KL7@rahul.net (USA)