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

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.