LIBOR, Treasury Index, CODI, COFI….What Do These Letters Mean?

If you’ve looked at your loan documents lately (which, I hope you have after having read my blog), you might have noticed that your loan is tied to an Index upon which the payment is based on. Basically, your adjustable rate is figured by adding the index to the margin, whichever index your loan is tied to.

There are quite a few indices, but the most common one I see in homeowners’ loan documents is the LIBOR, which stands for the London Interbank Offering Rate.

The LIBOR is the daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market).

The majority of loans I see are tied to the LIBOR index, although recently I’ve seen a handful of loans tied to the Treasury Index, (or CMT for Constant Maturity Treasury), which is the average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board.

Recently, I also saw a large loan that was based on the COFI, or Cost of Funds Index, or more formally, the 11th District Cost of Funds Index of the Federal Home Loan Bank (FHLB), which is located in San Francisco. The 11th District includes the states of California, Nevada, and Arizona.

What’s interesting about these indices is that it is very difficult, if not impossible, to properly disclose the terms of these mortgages. Why? Because no one knows what the index will be in the future. I doubt the authors of the TILA foresaw the advent of adjustable rate mortgages. The financial industry keeps coming up with sophisticated products that consistently outpace our government’s ability to regulate them. Adjustable rate mortgages are just one of those inventions.

If a loan was really large, the bank would need to hold the note on its books, which meant it could not be securitized. The bank would not be able to free up the capital by selling the Note, it had to find a way to make money on the loan, so it sold the borrower an exotically financed loan.