COFI Loans - Cost of Funds Index (COFI)

Different parts of the country use different benchmarks to determine the cost of funds. The 11th District Cost of Funds is typically used in the Western portion of the U.S., while the 1-Year Treasury Security is more common in the East. The slower-moving 11th District Cost of Funds is more popular with buyers, while the 1-Year Treasury Security is the preferred choice of lenders and investors.

The 11th District has been publishing a monthly weighted average through the Federal Home Loan Bank of San Francisco since August 1981. It is estimated that more than 50% of home loans made by California savings institutions rely upon the 11th District Cost of Funds (COFI) index.

The 11th District of the Federal Home Loan Bank includes saving institutions located in California, Nevada and Arizona. Although many people have mortgages tied to the 11th District Cost of Funds, few of them understand how the rate is calculated or when and why it is adjusted.

Prior to the use of the 11th District Cost of Funds index, the cost of funds was determined by the semiannual weighted average cost of funds. These rates were published at the end of June and December each year. The San Francisco Bank is credited with being the first Federal Home Loan Bank to publish the cost of funds index on a monthly basis.

The formula used to calculate the 11th District Cost of Funds index includes the total liabilities held by all 11th District savings institutions, the total amount of funds held by these institutions, advances received from the Federal Home Loan Bank, as well as any other obligations created by the member banks. The interest paid by the banks for all this results in the true cost of funds.  The bank then calculates the ratio between the amount paid in interest and the average balance of the loans to arrive at the weighted average cost of funds ratio for that month.

The term weighted means that all three fund types, along with their costs, are added together before calculating the ratio, as opposed to calculating averages on an individual basis and taking the resulting average as the cost. Weighting puts the emphasis on interest the banks pay on funds held on deposit. This also explains why the average moves slower than the 1-Year Treasury Security index.