On the Consequences of the Discontinuation of the Eleventh District Cost of Funds Index

The Federal Home Loan Bank of San Francisco announced its intention to discontinue the three Eleventh District Weighted Average Cost of Funds Indexes (COFI). As these indexes are used to benchmark many ARM mortgages, their discontinuation raises two important issues. First, are mortgage markets losing significant information and efficiency in their absence, and second, does this action result in significant consumer and financial institution costs? Though COFI was somewhat unique when first constructed in 1981, we find that there are now good close substitutes available. In addition, a time series analysis of COFI demonstrates that its quality and time consistency has deteriorated since its inception making it a less useful, and perhaps misleading measure of savings institutions’ cost of funds. The analysis also suggests research into the fidelity of other long lived and oft-used indexes is likely warranted.