11th District Cost of Funds Index: Understanding Its Mechanism and Impact

The 11th District Cost of Funds Index, commonly referred to as COFI, is a monthly weighted average interest rate calculated based on the interest expenses of savings institutions operating within the states of Arizona, California, and Nevada. This index is widely recognized in financial markets, particularly for its use in adjustable-rate mortgages (ARMs).

How COFI is Calculated

COFI is computed by the Federal Home Loan Bank of San Francisco (FHLBSF) and reflects the cost of funds for savings institutions within its 11th District. The calculation involves a weighted average of the interest rates paid by these institutions on various types of deposits, including:

• Savings accounts
• Time deposits (such as certificates of deposit)
• Borrowings

The formula can be expressed as:

where:

• \( N \) represents the number of savings institutions,
• \(\text{Interest Expense}_i\) is the interest paid by the \(i\)-th institution, and
• \(\text{Weight}_i\) is the corresponding weight (amount of funds).

Historical Context of COFI

COFI originated in the 1980s during a period of significant interest rate volatility. It was developed to provide a more stable and predictable benchmark for adjustable-rate mortgages (ARMs). This helped align the cost of funds for lenders with the interest rates charged to borrowers.

Adjustable-Rate Mortgages (ARMs)

COFI is notably used as an index for ARMs, especially in the western United States. Lenders use COFI to determine interest rate adjustments for these loans. Because COFI represents a weighted average of interest rates, it tends to be less volatile than other indices like the London Interbank Offered Rate (LIBOR), providing more stability for borrowers.

Financial Markets and Institutions

Financial markets closely monitor COFI as it reflects the cost of borrowing for savings institutions. Changes in COFI can influence lending rates, the profitability of financial institutions, and broader economic conditions in the states of Arizona, California, and Nevada.

Comparison to Other Indices

COFI is one of several indices used in mortgage lending. Key comparisons include:

• LIBOR (London Interbank Offered Rate): A global benchmark interest rate often used in ARMs, but generally more volatile than COFI.
• Treasury Indices: Reflects U.S. government bond yields and is another common benchmark for ARMs.

The main distinction of COFI lies in its regional specificity and its relatively stable nature.

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