What Is the 11th District Cost of Funds Index?

The 11th District Cost of Funds Index (COFI) is a monthly weighted average interest rate that reflects the cost of funds for savings institutions headquartered in the 11th Federal Home Loan Bank District. This district includes California, Arizona, and Nevada. COFI was designed to serve as a benchmark for adjustable-rate mortgages (ARMs), providing lenders and borrowers with a reference rate that moves in line with the cost of obtaining funds for certain thrift institutions.

Published by the Federal Home Loan Bank (FHLB) of San Francisco, the index tracks the interest expenses paid by these institutions to attract and retain deposits or borrowed money. It was once one of the most widely used indices for ARMs in the western United States, particularly in California.

How COFI Is Calculated

The 11th District COFI is based on the average interest expenses incurred by member savings institutions related to their funding sources, such as deposit accounts and borrowed funds. Each institution’s cost of funds is weighted by the average amount of funds they held during the reporting period. These data are collected and aggregated to produce a single index figure that is published at the end of each month.

The formula considers:

• Interest paid on all liabilities (deposits, advances, and other borrowings)
• The volume of those liabilities
• The duration of time those funds were held

Only institutions that are members of the FHLB of San Francisco and headquartered in the 11th District are included. Because of this limited scope, the index reflects a specific regional and institutional perspective, rather than a broad market-based rate.

Role in Mortgage Lending

COFI became widely used in the 1980s and 1990s as a reference rate for ARMs, especially in California. Lenders would structure loans with interest rates that adjusted periodically based on movements in the COFI, plus a fixed margin. For example, an ARM might be described as “COFI + 2.50%,” meaning the interest rate would equal the current COFI rate plus an additional 2.50%.

One key characteristic of COFI is its relatively slow responsiveness to short-term interest rate changes. Because it reflects the average cost of funds, which includes longer-term liabilities such as certificates of deposit and advances from the FHLB, it tends to be more stable than other benchmarks like the London Interbank Offered Rate (LIBOR) or the Constant Maturity Treasury (CMT) index. This smoothing effect meant smaller monthly changes in mortgage payments, which appealed to borrowers seeking predictability.

However, this lag in responsiveness also meant that COFI could underreact in rising interest rate environments, potentially disadvantaging lenders whose funding costs rose more rapidly than the index reflected.

Decline in Use and Discontinuation

Despite its popularity in earlier decades, the use of COFI as a mortgage index declined significantly in the 2000s and 2010s. Several factors contributed to this trend:

• The availability of alternative indices, such as LIBOR and CMT, which offered broader market coverage and global recognition.
• Shifts in the structure of the mortgage market, including a decline in the number of thrift institutions and a rise in securitized mortgage products.
• Regulatory changes that reduced the influence of regionally based funding models in favor of national or global financial benchmarks.

The final blow to the index came with its official discontinuation. The Federal Home Loan Bank of San Francisco announced that it would stop publishing the 11th District COFI after the December 2020 release. The last COFI was published in January 2021, reflecting data through December 2020.

Lenders who had existing loans tied to COFI were required to update disclosures and transition borrowers to alternative indices, such as the Secured Overnight Financing Rate (SOFR), based on the terms outlined in their mortgage agreements or regulatory guidance.

Comparison with Other Indices

Compared to other benchmark indices, COFI stood out for its stability. While indices like LIBOR reacted quickly to economic shifts and monetary policy changes, COFI’s composition gave it a smoothing effect. This made it particularly attractive in volatile interest rate environments.

However, its regional and institutional limitations also made it less representative of broader financial market conditions. As the mortgage market evolved, the industry favored indices that offered greater transparency, international applicability, and market-based pricing.

The transition away from COFI paralleled a broader trend in financial markets away from indices based on institutional reporting and toward those rooted in transaction-based data, such as SOFR.

The Bottom Line

The 11th District Cost of Funds Index served as a reliable benchmark for adjustable-rate mortgages for several decades, particularly in the western United States. Its regional focus and slow-moving nature made it appealing to borrowers looking for payment stability. Over time, however, structural shifts in the financial system and the emergence of more global, transparent indices led to its decline. As of 2021, COFI is no longer in use, but its legacy remains relevant in discussions about mortgage index selection and the evolution of interest rate benchmarks.