For decades, the 11th District COFI played a major role in the U.S. mortgage market, especially across the western states. Millions of borrowers with adjustable-rate mortgages (ARMs) saw their loan payments rise or fall based partly on this index.
Although the index was discontinued in 2022, its influence still matters because many legacy mortgage contracts, replacement indexes, and adjustable-rate lending practices evolved from the COFI framework. Understanding how the 11th District COFI worked also provides valuable insight into how banks price mortgage risk, how interest-rate indexes shape borrowing costs, and why some mortgage products behave differently during changing economic conditions.
For homeowners, real estate investors, mortgage borrowers, and finance professionals, the history of the 11th District COFI reveals how interest-rate benchmarks affect everything from monthly payments to housing affordability and banking profitability.
What Is the 11th District COFI?
The 11th District Cost of Funds Index, commonly called the 11th District COFI, was a monthly interest-rate index used primarily for adjustable-rate mortgages in the western United States.
The index measured the average cost of funds for savings institutions located in:
- Arizona
- California
- Nevada
The Federal Home Loan Bank of San Francisco introduced the index in 1981 and published it until January 31, 2022.
Mortgage lenders used the 11th District COFI as a benchmark to determine how ARM interest rates should adjust over time. When the index increased, mortgage rates tied to it generally moved higher. When the index declined, ARM borrowers could see lower rates and smaller monthly payments.
The index became especially important during periods of volatile interest rates because it provided a relatively stable alternative to faster-moving benchmarks such as Treasury yields or LIBOR-linked rates.
Why the 11th District COFI Was Created
The early 1980s represented one of the most turbulent periods in modern U.S. interest-rate history.
Inflation surged during the late 1970s, prompting the Federal Reserve under Chairman Paul Volcker to aggressively raise interest rates. Mortgage rates climbed dramatically, sometimes exceeding 18%.
Banks and savings institutions faced enormous pressure because they funded long-term fixed-rate mortgages using short-term deposits. As deposit costs rose rapidly, lenders struggled to remain profitable.
The 11th District COFI emerged during this environment as a mechanism to better align mortgage pricing with the actual funding costs of savings institutions.
Instead of tying mortgages solely to Treasury rates or broader market yields, the COFI reflected what western banks and thrifts were actually paying depositors.
This approach aimed to:
- reduce lender risk
- stabilize ARM pricing
- smooth rate fluctuations
- protect savings institutions during volatile periods
- improve mortgage-market flexibility
The index became especially popular in California and neighboring western states where savings-and-loan institutions dominated mortgage lending.
How the 11th District COFI Was Calculated
The 11th District COFI was based on the weighted average cost of funds incurred by member savings institutions in the 11th Federal Home Loan Bank District.
The calculation incorporated several funding sources, including:
- savings accounts
- checking deposits
- certificates of deposit (CDs)
- borrowings
- other interest-bearing liabilities
Savings account interest carried particularly heavy weighting in the formula.
Because deposit rates often change gradually, the index moved more slowly than market-based interest-rate benchmarks.
Why the COFI Moved Slowly
One defining characteristic of the 11th District COFI was its relatively low volatility.
Unlike Treasury yields, which react instantly to market expectations, inflation data, and Federal Reserve decisions, COFI adjusted gradually because it reflected the average funding costs of banks over time.
That created what analysts often described as a “lagging effect.”
Mortgage rates linked to the index typically reacted to economic changes with delays of several months.
This slower adjustment process produced both advantages and disadvantages.
Advantages of Lower Volatility
The gradual movement of the COFI helped borrowers avoid sudden payment shocks.
For example, if the Federal Reserve rapidly increased interest rates, borrowers tied to faster-moving indexes might experience immediate jumps in monthly mortgage payments.
COFI-based borrowers often saw:
- slower payment increases
- smoother rate transitions
- more predictable budgeting
- reduced short-term volatility
This stability appealed to many homeowners.
Disadvantages of the Lagging Structure
The same lagging effect could work against borrowers when interest rates declined.
If market rates fell quickly, COFI-linked mortgages often adjusted downward more slowly than mortgages tied to faster benchmarks.
As a result, borrowers sometimes paid above-market rates for longer periods during declining-rate environments.
How the 11th District COFI Influenced Adjustable-Rate Mortgages
The primary purpose of the 11th District COFI was to serve as a benchmark for adjustable-rate mortgages.
ARMs differ from fixed-rate mortgages because their interest rates can change periodically after an initial fixed period.
A typical ARM contains two components:
- the index
- the margin
The index reflects broader market conditions, while the margin is a fixed percentage added by the lender.
For example:
- COFI Index: 2.0%
- Lender Margin: 2.5%
- ARM Interest Rate: 4.5%
If the COFI later increased to 3%, the mortgage rate could rise to 5.5%.
The margin remained constant throughout the life of the loan, but the index fluctuated.
Why Lenders Preferred COFI-Based ARMs
Lenders favored COFI-based ARMs because the index closely tracked their own funding costs.
That alignment reduced what banks call “interest-rate mismatch risk.”
Banks typically borrow short-term funds from depositors while issuing long-term mortgage loans. If funding costs rise sharply while mortgage income remains fixed, profitability can collapse.
By linking mortgages to COFI, lenders could gradually pass rising funding costs to borrowers.
This mechanism became particularly important after the savings-and-loan crisis exposed the dangers of funding long-term fixed mortgages with volatile short-term deposits.
The Regional Importance of the 11th District COFI
The COFI was primarily associated with western U.S. mortgage markets.
California especially became a major center for COFI-linked lending due to the large presence of savings institutions and the region’s massive housing market.
Meanwhile, lenders in eastern states often preferred Treasury-based ARM indexes, particularly the 1-year Treasury index.
This regional difference reflected historical banking structures and mortgage-market practices.
Why the Western Housing Market Used COFI More Heavily
Several factors contributed to the index’s western dominance.
Savings-and-Loan Industry Influence
Western states historically relied heavily on savings-and-loan associations for home financing.
These institutions preferred indexes tied directly to deposit funding costs.
Rapid Housing Growth
California, Arizona, and Nevada experienced rapid housing expansion during the late 20th century.
Adjustable-rate mortgages became popular because they allowed borrowers to qualify for larger loans through lower initial rates.
High Property Prices
Expensive housing markets increased demand for alternative mortgage structures.
COFI-based ARMs often offered more stable payment adjustments compared with Treasury-indexed loans.
The Relationship Between COFI and Interest Rates
The 11th District COFI reflected broader economic conditions, even though it moved slowly.
Several major forces influenced the index.
Federal Reserve Policy
Federal Reserve interest-rate decisions affected bank funding costs.
When the Fed raised benchmark rates:
- deposit costs usually increased
- savings-account yields rose
- lender funding expenses climbed
Eventually, the COFI increased as well.
Inflation Trends
Higher inflation typically leads to higher interest rates throughout the economy.
Banks often raise deposit rates to remain competitive, increasing the cost of funds included in the index.
Banking Competition
Aggressive competition for deposits could also influence the COFI.
If banks needed more funding, they might raise savings rates, which pushed the index upward.
Why the COFI Was Discontinued
The Federal Home Loan Bank of San Francisco stopped publishing the 11th District COFI on January 31, 2022.
Several factors contributed to the decision.
Declining Use of COFI-Based Mortgages
Over time, mortgage markets evolved away from COFI-linked products.
Lenders increasingly preferred other benchmarks such as:
- LIBOR
- SOFR
- Treasury indexes
- Constant Maturity Treasury (CMT) rates
The number of active COFI-based loans declined significantly.
Regulatory Changes After the Financial Crisis
The 2008 global financial crisis reshaped financial regulation.
Benchmark transparency, market integrity, and index governance became major concerns.
Financial markets increasingly favored indexes tied to deeper, more liquid markets.
Operational and Administrative Costs
Maintaining specialized regional indexes became less practical as mortgage markets standardized nationally.
Publishing the COFI required ongoing data collection, calculations, compliance oversight, and operational infrastructure.
The Enterprise 11th District COFI Replacement Index
When the original index ended, Freddie Mac introduced the Enterprise 11th District COFI Replacement Index.
The replacement was designed to support existing mortgage contracts that still referenced the discontinued benchmark.
Without a replacement, borrowers and lenders could have faced legal uncertainty regarding ARM adjustments.
Why Benchmark Replacement Matters
Mortgage contracts often last decades.
If an index disappears, lenders must determine:
- how rates should adjust
- which replacement benchmark applies
- whether contractual terms permit substitutions
- how borrowers are notified
Benchmark transitions became a major financial-industry issue globally after the phaseout of LIBOR.
The COFI replacement process reflected broader efforts to ensure continuity in financial contracts.
COFI vs. Other Mortgage Indexes
The 11th District COFI differed significantly from other mortgage benchmarks.
| Index | Key Characteristic | Volatility |
|---|---|---|
| 11th District COFI | Deposit-cost based | Low |
| 1-Year Treasury | Government bond yield | Moderate |
| LIBOR | Interbank lending rate | Higher |
| SOFR | Overnight Treasury-backed borrowing | Market-driven |
| Prime Rate | Bank lending benchmark | Moderate |
COFI’s main advantage was stability.
Its main disadvantage was slower responsiveness to falling interest rates.
Risks of COFI-Based Mortgages
Although COFI-based ARMs offered smoother adjustments, they still carried risks.
Payment Increases
Borrowers remained exposed to rising interest rates.
Even gradual increases can significantly affect long-term housing costs.
Complexity
Many borrowers did not fully understand how adjustable-rate mortgages worked.
This became a major issue during housing booms when some consumers focused mainly on low introductory rates.
Long-Term Uncertainty
Fixed-rate mortgages provide certainty. ARMs do not.
COFI borrowers faced uncertainty regarding future payments, especially during periods of inflation or Federal Reserve tightening.
Why the History of COFI Still Matters
Even though the 11th District COFI no longer exists, its legacy remains important in mortgage finance.
The index illustrates how financial institutions attempt to balance:
- borrower affordability
- lender profitability
- funding stability
- interest-rate risk
- housing-market growth
It also demonstrates how mortgage benchmarks shape the real economy.
Mortgage indexes influence:
- home affordability
- refinancing decisions
- household cash flow
- housing demand
- bank earnings
- real estate investment
Understanding the COFI helps borrowers better understand the mechanics behind adjustable-rate lending.
Frequently Asked Questions
What was the 11th District COFI?
The 11th District COFI was a monthly interest-rate index measuring the average cost of funds for savings institutions in Arizona, California, and Nevada.
What was the 11th District COFI used for?
The index was mainly used to adjust interest rates on adjustable-rate mortgages in the western United States.
Why did lenders use the 11th District COFI?
Lenders used the index because it reflected their actual funding costs and provided smoother mortgage-rate adjustments compared with more volatile benchmarks.
Why was the 11th District COFI considered stable?
The index moved slowly because it relied heavily on deposit rates, which typically change more gradually than market-based interest rates.
When was the 11th District COFI discontinued?
The Federal Home Loan Bank of San Francisco stopped publishing the index on January 31, 2022.
What replaced the 11th District COFI?
Freddie Mac developed the Enterprise 11th District COFI Replacement Index to support existing mortgage contracts tied to the old benchmark.
Is the 11th District COFI still used today?
The original index is no longer published, but replacement indexes continue supporting legacy mortgage agreements.
Key Takeaways
- The 11th District COFI was a mortgage benchmark used primarily in western U.S. states.
- It reflected the average funding costs of savings institutions in Arizona, California, and Nevada.
- COFI-based ARMs adjusted more slowly than many other adjustable-rate mortgage products.
- The index reduced short-term payment volatility but reacted slowly to falling interest rates.
- The Federal Home Loan Bank of San Francisco discontinued the index in 2022.
- Freddie Mac created a replacement benchmark for legacy contracts.
- The history of the COFI highlights the relationship between banking costs, mortgage pricing, and housing-market risk.
Conclusion
The 11th District COFI played a defining role in western U.S. mortgage finance for more than four decades. By linking adjustable-rate mortgages to the funding costs of savings institutions, the index helped lenders manage interest-rate risk while offering borrowers relatively stable payment adjustments.
Although the index disappeared in 2022, its influence continues through replacement benchmarks and legacy mortgage contracts. More importantly, the COFI remains an important case study in how financial benchmarks shape lending markets, housing affordability, and household finances.
For borrowers, the history of the 11th District COFI offers a broader lesson about adjustable-rate mortgages: understanding how mortgage indexes work can be just as important as understanding the loan itself.
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