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Cost of funds indexed mortgage contracts with government-backed catastrophic insurance (COFI-Cats): A realistic alternative to the 30-year fixed-rate mortgage?

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  • Hancock, Diana
  • Passmore, Wayne

Abstract

We analyze the feasibility an adjustable-rate mortgage product tied to a nationwide bank cost of funds index (COFI) that is equal to the total interest expense divided by the total liabilities for all domestic commercial banks. This mortgage product also includes actuarial-based government-backed tail-risk insurance provided either to bankers directly or to investors who purchase pools of these mortgages. We refer to a COFI mortgage with this form of catastrophic insurance as a “COFI-Cat” contract. The costs and benefits associated with these contracts are considered from the perspective of households, bankers, investors and policymakers using estimates of COFI-Cat rates constructed from historical data over 2000–2014, inclusive.

Suggested Citation

  • Hancock, Diana & Passmore, Wayne, 2016. "Cost of funds indexed mortgage contracts with government-backed catastrophic insurance (COFI-Cats): A realistic alternative to the 30-year fixed-rate mortgage?," Journal of Economics and Business, Elsevier, vol. 84(C), pages 109-130.
    • Handle: RePEc:eee:jebusi:v:84:y:2016:i:c:p:109-130
    DOI: 10.1016/j.jeconbus.2016.02.004
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    Cited by:

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    2. Jerry Nickelsburg & William Yu, 2021. "On the Consequences of the Discontinuation of the Eleventh District Cost of Funds Index," The Journal of Real Estate Finance and Economics, Springer, vol. 63(1), pages 143-160, July.

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    More about this item

    Keywords

    GSE; Fannie Mae; Freddie Mac; Mortgage-backed securities (MBS); Mortgages; Interest rates;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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