What Is the 11th District Cost of Funds Index?
Let me explain the 11th District Cost of Funds Index, or COFI, directly to you. This was a monthly index that captured the average interest rate paid by savings institutions in Arizona, California, and Nevada on checking and savings accounts. It served as one of several indices that mortgage lenders used to adjust interest rates on adjustable-rate mortgages, or ARMs, and it first came into use in 1981. With an ARM, your mortgage interest rate fluctuates based on a standard index selected by the lender, and COFI was especially popular in the western states.
The index got published on the last day of each month and represented the cost of funds for Western savings institutions that were members of the Federal Home Loan Bank of San Francisco, which acted as a self-regulatory agency. These institutions had to meet the Bank's criteria to be included. However, the Federal Home Loan Bank of San Francisco ceased publishing COFI on January 31, 2022. In its place, the Federal Home Loan Mortgage Corporation, known as Freddie Mac, introduced the Enterprise 11th District COFI Replacement Index.
Understanding the 11th District COFI
To understand how COFI worked, you need to know it was calculated using various factors, with the interest paid on savings accounts holding the biggest weight in the average. This setup gave the index low volatility, meaning it responded slowly to market interest rate changes—it's often seen as a two-month lagging indicator. Your actual mortgage interest rate wouldn't equal the COFI; instead, the ARM rate was usually 2% to 3% higher, depending on your credit history, the loan's size and terms, your negotiation skills with the bank, and other elements.
Since COFI drew data from just three western states, it was mainly applied in the western U.S., while lenders in the eastern region preferred the 1-year Treasury index.
