11th District Cost of Funds Index (COFI) Explained:
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The 11th District Cost of Funds Index is the weighted average of the cost of borrowings (funds) to member banking institutions of the Federal Home Loan Bank of San Francisco. (Also known as the 11th District) The index rate has a tendency to lag market interest rate adjustments and for the most part is stable because institutions borrow money for varying terms and do not pay market rates for all of their funds. The COFI index is reported monthly. Although, the reported rate generally lags behind two months. (January's index is reported in March, May's index is reported in July)
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COFI moves differently than market interest rates, why is that the case?
COFI’s movements are affected by a few factors, such as fluctuations in market interest rates, the sources of funds used by COFI’s reporting members, M and A (merger and acquisition) activities, and changes in accounting regulations.
Large merger and acquisitions transactions (large enterprise companies, financial institutions, etc.) can affect interest expense if the activity results in a mark-to-market gain or loss on funds acquired by a COFI reporting member.
Simply put, the movement of COFI cannot be predicted and historical COFI rates should never be relied on as an indicator of future COFI rates. Additionally, the movement of COFI may not correspond to the movement of market interest rates.
How is the COFI calculated?
COFI is the ratio of monthly interest expenses to total funds. The COFI is also calculated by taking into consideration the number of days in a particular month as annualized and expressed as a percentage. Interest expenses, the numerator of the calculation, include the total amount of interest reported for the month on all deposit accounts, Federal Home Loan Bank loans, and other various borrowings. Total funds is considered the denominator of the calculation, consisting of the simple average of the most recent two months balances from Deposit Accounts, Federal Home Loan Bank loans, and other borrowings.
As mentioned previously that the number of days in each month is different, the resulting quotient is multiplied with an adjustment factor that is calculated by dividing an average month (based on a 12-month, 365-day or 366-day year) by the actual number of days in that particular month.
What effect do changes within COFI reporting members or Merger and Acquisition activity have on COFI’s monthly calculations?
COFI is based on data received from a Bank's COFI reporting members. Should a COFI reporting member engage in corporate activity, such as changing its charter or merging into an entity behind a different charter, the Bank may determine that the resulting entity no longer qualifies as a COFI reporting member and will no longer be included in the COFI. Similarly, should a COFI reporting member’s Bank membership be terminated, it will no longer be included by the COFI reporting members.
As a result of mergers, acquisitions, charter changes, and terminations of Bank memberships, the total number of institutions included in the COFI Reporting Members has declined significantly since January, 1991. The total number of COFI Reporting Members was 153 in January of 1991, 81 in January of 1996, 49 in January of 2001, and 26 in January of 2007.
Additionally, transactions that transfer liabilities between a COFI reporting member and an institution that is not a COFI reporting member during a given month can also affect the COFI because the interest expense and average total funds for that month are adjusted by the Bank so that the average dollar amount of total funds (the COFI denominator) will include only those funds for which the corresponding amount of interest expense has been included in the COFI numerator for that month.
Are new savings institutions ever added to the COFI Reporting Members?
COFI is based on data received from a Bank's COFI reporting members. Should a COFI reporting member engage in corporate activity, such as changing its charter or merging into an entity behind a different charter, the Bank may determine that the resulting entity no longer qualifies as a COFI reporting member and will no longer be included in the COFI. Similarly, should a COFI reporting member’s Bank membership be terminated, it will no longer be included by the COFI reporting members.
Yes. New savings institutions that are chartered with one of COFI’s principal offices in California, Arizona, or Nevada and that also meet the Bank's criteria for inclusion; will become a COFI reporting member when it becomes a member of the bank.
When is the COFI announced?
COFI is based on data received from a Bank's COFI reporting members. Should a COFI reporting member engage in corporate activity, such as changing its charter or merging into an entity behind a different charter, the Bank may determine that the resulting entity no longer qualifies as a COFI reporting member and will no longer be included in the COFI. Similarly, should a COFI reporting member’s Bank membership be terminated, it will no longer be included by the COFI reporting members.
The Bank will announce the COFI for a given month at or after 3 p.m. (Pacific Time) on the last business day of the following month. Here is an example: the COFI for August, which reflects the interest expenses reported by COFI reporting members during the month of August, is announced on the last business day of September at or after 3 p.m. (Pacific Time)
Will a change in the COFI affect my mortgage payment?
The effect of a change in the COFI on your mortgage payment depends on your lender's mortgage documents. Changes in the COFI may not coincide with changes in your mortgage payments because the use of adjustable rate mortgage indices varies greatly among lending institutions.
Most likely, your mortgage note will identify the index to be used, your lender's method for adjusting the interest rate in regard to mortgage payments, and last your lender's timetable for notifying you of any changes in the rate and payment with regard to changing interest rates.
Could my loan be tied to another index other than COFI?
Yes. There are many other adjustable rate mortgage indexes that are tied to mortgage loan products. Your mortgage contract between you and your lender identify the specific index which your loan is tied to.
