Historical Mortgage Trends
11th District Cost of Funds
The Federal Reserve System consists of twelve separate districts within the United States. The 11th District consists of Arizona, California and Nevada and includes all the various banking institutions located within those states.
COFI is the acronym for the 11th District Cost Of Funds Index. This index is said to be the weighted average cost for these banking institutions to attract funds to lend. In simple terms, it represents what they pay depositors on checking accounts, money markets accounts, certificate of deposits, etcetera as well as their cost for funds they borrow directly from a Federal Home Loan Bank.
As the demand for lending/borrowing increases (causing interest rates to rise), banking institutions increase the amount they are willing to pay depositors to deposit funds in their institutions, thereby attracting more funds, increasing their weighted cost of funds and further increasing long term interest rates. This phenomenon helps explain the lagging nature of this index relative to rising fixed interest rate loans. Likewise, as interest rates peak and begin to turn down, this index will continue to rise for a short period of time.
Presumably, the margin that lenders charge above the index rate is used to cover the institutions' operating expenses with any remainder being profit…not a bad business.
Maybe it all started like this: Banker One: “Let’s start a business where people give us their money and we lend it back to them at a premium.”...Banker Two: ”Sounds good to me.”…Banker One: “What should we call it?”…Banker Two: “A scam.”…Banker One: ”No, how about a bank?... Banker Two: “Sounds good to me!”