The Federal Costs Of Funds Index (COFI)

What is the Federal Cost of Funds Index (COFI), and what impact does it have on real estate investors? 

In this article, we’ll discuss how the COFI, derived from Treasury bill and note rates, affects borrowing costs and impacts real estate investors. 

What is the Federal Cost of Funds Index (COFI)? 

The federal Cost of Funds Index, or COFI, is a federal benchmark for mortgage loans and securities. It represents an average of interest rates incurred by banks and other financial institutions, which is in turn used by those institutions to calculate where to set interest rates over time for variable loans, like adjustable-rate mortgages

Each time the interest rate of an adjustable-rate mortgage adjusts, the bank or lender will use the COFI to determine how much the rate should change. Thus, COFI serves as a standard and point of reference that influences interest rates, and in turn, the housing market.  

How Does the Federal COFI Work? 

COFI is derived from the cost of funds for banks and lenders when they acquire funds to lend to customers. More specifically, COFI is a weighted average cost of funds for financial institutions like banks.  

The federal COFI is updated near the end of each month and made available by Freddie Mac, which first published the COFI in 1991. 

Before 2022, many adjustable-rate mortgages were based on the 11th District Monthly Weighted Average Cost of Funds Index, which was an index based on banks specifically in Arizona, California, and Nevada and that was published regularly by the Federal Home Loan Bank of San Francisco. In January of 2022, the 11th District COFI was retired due to a decline in member institutions eligible to report the data on which the index’s calculations were based. In the aftermath of this decision, many loans with interest rates based on the 11th District COFI had to be transitioned to other indices, including ones based on the federal COFI. 

Cost of funds indices in general are based on a foundation of interest rates set by various institutions, plus a margin that the lender will tack on. 

How is the Federal COFI Calculated? 

The federal COFI is calculated by summing the monthly average interest rates for marketable Treasury bills, dividing that sum by two, and then rounding to three decimals.  

Note that the index remains unadjusted for fluctuations in underlying Treasury rates. The latest data for February 2024 shows the federal COFI at 3.889%. 

It’s important to acknowledge that the accuracy of the federal COFI is not necessarily guaranteed, since it is not adjusted according to changes in underlying Treasury rates. The cost of funds index is generally not revised or republished after it has been published. 

Monitoring the federal COFI is crucial for understanding trends in the housing industry and making informed decisions regarding mortgage loans and investments.  

Implications of Federal COFI in Real Estate 

As the federal COFI fluctuates, it directly influences the interest rates on adjustable-rate mortgage loans. Borrowers with adjustable-rate mortgages tied to the COFI may experience changes in their monthly payments based on this index. 

A higher federal COFI could lead to increased interest rates, potentially raising monthly mortgage payments. Conversely, a lower federal COFI could result in decreased interest rates and lower monthly payments. However, not all mortgages will be affected by the federal COFI. Your monthly mortgage payment depends on the stipulations your lender has included in the mortgage note, including the index that will be used to adjust the interest rate, the lender’s specific methodology for making that calculation, and other factors.  

This can lead to some variation in how much real estate investors are affected by the federal COFI. It’s best to speak to your lender directly if you aren’t sure how your interest rate is calculated. The key is being informed about what your mortgage rate is based on and when to expect fluctuations.  

Other Indices to Note 

If you have an adjustable-rate mortgage, it won’t necessarily be governed by the federal cost of funds index. 

There are several other adjustable-rate mortgage indices that may be used by certain banks in place of the federal COFI. The index your loan uses will typically be specified in your mortgage documents. 

Besides the federal COFI, other adjustable-rate mortgage indices include: 

• The National Average Contract Mortgage Rate for the Purchase of Previously Occupied Homes by Combined Lenders (published by the Federal Housing Finance Agency) 
• The Federal Reserve Statistical Release H. 15, Selected Interest Rates (published by the Federal Reserve Bank of San Francisco) 
• The Enterprise 11th District COFI Replacement Index is the replacement index for the 11th District COFI for single-family home loans. This new index is based on the federal COFI and is currently published by Freddie Mac with a one-year transition period and spread adjustment to lesson the impacts of the switch. 

Strategies for Monitoring Cost of Funds Indices 

Implementing effective strategies for monitoring the federal COFI and other indices can aid in making informed decisions regarding adjustable-rate mortgages in real estate. 

One strategy is to regularly track and analyze the monthly federal COFI values provided by Freddie Mac around the 20th day. By staying updated on these values, you can identify trends, such as increases or decreases in the index, which can impact adjustable-rate mortgage rates. 

Additionally, comparing federal COFI trends with other indices and key economic indicators, such as Treasury rates, can provide a broader perspective on interest rate movements. 

Keeping an eye on historical federal COFI data since March 1991 can also help in understanding long-term patterns and forecasting potential future changes. 

Conclusion 

Now that you understand the Federal Cost of Funds Index (COFI) and its importance in the real estate market, you can make more informed decisions about your mortgage loans and investments. Keep an eye on the trends in COFI to stay ahead of the curve and take advantage of favorable borrowing costs.