11th District Cost of Funds Index (COFI) Details

Mortgage lenders use the 11th District Cost of Funds Index to adjust the interest rate, known as an adjustable-rate mortgage (ARM). In ARM, the interest rate applied on the outstanding balance will vary throughout the loan's lifespan. The initial interest rate is fixed for some time; then, it will reset periodically at monthly or yearly intervals depending on the 11th District Cost of Funds Index.

The 11th District Cost of Funds Index rate tends to lag market interest rate and is a two-month lagging indicator of market interest rates. The index value for one month is usually not reported until the end of the next month. For example, the 11th COFI for May will be reported on June's last business day; the November value will be reported on December's last business day.

Interest paid on savings accounts is the largest part of a COFI, and this index lags market interest rates. As a result, ARMs tied to this index rise and fall slowly than rates in general. However, such ARMs often have no month-to-month interest rate caps but have payment caps.

Real-World Example of 11th District Cost of Funds Index

Let's take the case of the Federal Home Loan Bank of San Francisco. It is a cooperative helping local lenders in Nevada, California, and Arizona change lives, build strong communities, and create opportunities for a better tomorrow.

On 30th March of 2020, the Federal Home Loan Bank of San Francisco announced that they were extending their deadline for discontinuing their cost of funds indices from early 2021 to early 2022.

Due to the significant decline in the number of financial institutions eligible to report the data used to calculate the indices, the bank announced on 7th December 2018 its decision to stop publishing the three cost of funds indices in early 2020.

The regulator requested the bank to extend the deadline to allow market participants sufficient time to appropriately transition to a COFI replacement index that is robust and sustainable. At the request of its regulator, the bank extended the deadline by one year to early 2021.

Members of the bank that meet specific criteria in Nevada, Arizona, and California are the only ones included in the indices of the 11th District. When developed in 1981, over 200 savings institutions reported their cost of funds data to the bank; today, there are only nine.

The study of the utility of existing and observable reference rate indices in the absence of the 11th District cost of funds indices was an independent study funded by a bank's research grant. UCLA Anderson School of Management unit (The UCLA Anderson Forecast) undertook the task; their findings contributed majorly to the 11th District Cost of Funds Index history.

History of the 11th District Cost of Funds Index

The Federal Home Loan Bank Board allowed adjustable-rate home mortgage loans by federally chartered savings institutions on 21st April 1981. The loans were to be linked to an index. Thus, a stable, published monthly benchmark rate was introduced, and this provided information to the market used to evaluate the attractiveness of these loans.

The number of 11th District member savings institutions has changed immensely since that time. The Savings and Loan (S&L) crisis in the late 1980s was considered the first underlying important change relevant to the 11th District COFI. Previous regulatory reform allowed troubled institutions to become profitable through higher deposit insurance and new Savings and Loan products.

The storied meltdown of the Savings and Loan industry, beginning in 1988, led to increased risk-taking on these same institutions. This resulted in the closure of nearly 800 savings institutions and sweeping regulatory re-organization. The index's statistical characteristics changed due to the original 11th District COFI panel changing. The cost of the discontinuation of the 11th District COFI is considered extremely minimal for the mortgage market.