What it is (short definition)
– The 11th District Cost of Funds Index (COFI) was a monthly benchmark that measured the average interest cost paid by savings institutions operating in Arizona, California and Nevada. Lenders used it as the reference index for some adjustable-rate mortgages (ARMs) in the western U.S.
Quick historical notes
– Created in 1981 for savings institutions in the 11th Federal Home Loan Bank District (AZ, CA, NV).
– Published at month-end using data from member institutions that met the bank’s inclusion rules.
– The Federal Home Loan Bank of San Francisco stopped publishing the original COFI on January 31, 2022.
– Freddie Mac developed an “Enterprise 11th District COFI Replacement Index” to serve as a successor reference.
Key definitions
– Index: a published number used to track a market quantity (here, the average funding cost of certain savings institutions).
– Adjustable-rate mortgage (ARM): a mortgage whose interest rate is tied to an index plus a fixed margin and can change at scheduled adjustment dates.
– Margin: the fixed percentage a lender adds to the index to determine the borrower’s ARM rate (ARM rate = index + margin).
– Lagging indicator: a statistic that reacts more slowly to market changes than forward-looking rates; COFI historically moved more gradually than short-term market yields.
How COFI behaved and why it mattered
– Composition: the index gave the largest weight to interest paid on savings accounts; other funding costs were included too. Because deposit rates change slowly, COFI typically showed low volatility.
– Timing: historically it behaved like a lagging indicator — roughly two months behind abrupt market moves — so ARM rates tied to it adjusted more slowly than index rates tied to short-term Treasury instruments.
– Geography: because it represented institutions in three western states, COFI was mainly used in western-region ARM contracts; other regions often used different indices, e.g., a 1-year Treasury-based index in the eastern U.S.
– Borrower rate vs. index: the mortgage’s contract interest rate usually exceeds the index by a margin (commonly 2%–3% historically), and the final rate depends on borrower-specific and loan-specific terms.
Checklist: what to check if you see COFI in mortgage paperwork
– Which COFI is specified: the original 11th District COFI (no longer published) or the Freddie Mac “Enterprise 11th District COFI Replacement Index.”
– The stated margin (index + margin = ARM rate).
– Adjustment frequency and timing (e.g., annually, every six months) and any lookback period that determines which published index value applies.
– Caps and floors: periodic adjustment caps and lifetime caps that limit how much the rate can change.
– Publication source and effective date (so you know where to look for the official index values).
– Historical behavior: inspect several years of the index to estimate how quickly it reacts to market rate moves.
– Contract language about negative amortization, minimum rates, or rate floors.
Small worked example (step-by-step)
Assumptions:
– Loan principal: $300,000
– ARM contract: “index + margin”
– Index used for this example: COFI = 0.50%
– Margin = 2.75%
– Term for payment calculation: 30-year amortization (360 monthly payments)
Step 1 — compute the annual interest rate:
– ARM rate = index + margin = 0.50% + 2.75% = 3.25% annually.
Step 2 — convert to monthly rate:
– monthly r = 3.25% / 12 = 0.00270833 (about 0.2708% per month).
Step 3 — compute the standard fixed-payment mortgage monthly amount:
– payment = P * r / (1 − (1 + r)^−n)
– payment = 300,000 * 0.00270833 / (1 − (1 + 0.00270833)^−360)
– Numerically this gives about $1,306 per month.
Step 4 — effect of an index increase
– If COFI later rises to 1.50%, new ARM rate = 1.50% + 2.75% = 4.25% → monthly payment ≈ $1,476.
– Payment change ≈ $170/month higher, illustrating how a modest rise in the index can materially increase monthly cost.
Notes and caveats about the example
– The example ignores caps, floors, prepayment, taxes, insurance, and possible escrow changes.
– Real ARM contracts can include lookback provisions and timing rules that change which published index value is used at adjustment.
Why COFI produced lower short-term volatility
– Because deposit rates and traditional savings-instrument costs tend to move slowly and because COFI weights savings-account costs heavily, the index rose and fell more gradually than market short-term yields — hence the “lagging” behavior.
Practical use for borrowers and students
– For a borrower, the critical contract items are the exact index definition, the lender’s margin, adjustment schedule, and caps.
– For a student or analyst, COFI is an example of a regionally focused funding-cost index whose composition causes smoothing and lag relative to market-based indices (e.g., short-term Treasuries).
References (for further reading)
– Investopedia — “11th District Cost of Funds Index (COFI)” https://www.investopedia.com/terms/1/cofi.asp
– Freddie Mac — Primary Mortgage Market Survey / PMMS resources (repository for Freddie Mac index material) https://www.freddiemac.com/pmms
– Consumer Financial Protection Bureau — Adjustable Rate Mortgages (consumer guide) https://www.consumerfinance.gov/owning-a-home/loan-options/adjustable-rate-mortgage/
– Federal Home Loan Bank of San Francisco — official site (historical publisher of the 11th District COFI) https://www.fhlbsf.com/
Educational disclaimer
This explainer is for educational purposes only and does not constitute investment, tax, or mortgage advice. Always consult a qualified mortgage professional or financial advisor about specific loan terms, risks, and suitability before making borrowing decisions.