Magazine article American Banker

COFI Loans Helped by Hike, but Signs Point to Woes in '95

Magazine article American Banker

COFI Loans Helped by Hike, but Signs Point to Woes in '95

Article excerpt

The recent hike in rates will temporarily reinforce the popularity of a highly successful mortgage product used by California thrifts. But signs point to a slowdown next year.

Bank executives and analysts are saying that mortgage loans tied to the 11th District Cost of Funds index, so-called COFI loans, will retain their advantage as long as short-term rates are on the upswing.

But that advantage may be short-lived and there are signs that thrifts are taking a more conservative stance in pricing and marketing the loans.

Adjustables linked to COFI have been the 800-pound gorilla of this year's mortgage originations market. Since COFI, which tracks the average cost of funds in California, Nevada, and Arizona, includes a mix of short-term and long-term instruments, it lags behind the Treasury market and tends to reprice slowly.

So while the average one-year adjustable mortgage that is linked to a Treasury security has skyrocketed by 1.85 percentage points this year, to 6.14%, teaser rates on one month COFI-based loans have increased by only 4 basis points, to 3.82%, according to HSH Associates, a New Jersey company that monitors mortgage rates.

"As rates continue to rise the COFI effect will continue," said Joseph Morford, a thrift analyst with Keefe, Bruyette & Woods.

Mr. Morford is concerned by some aspects of COFI's popularity. "These deep teaser rates are uneconomical. If rates stabilize they will be able to catch up on the COFI lag as the loans reprice but," if rates rise California's recovery could stall out, causing credit problems, he said. …

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