The Impact of a Market Without the Libor Index

The Libor index will be phased out over the next 5 years after allegations surfaced of bankers manipulating it. This will have the largest impact on adjustable rate mortgage loans (ARMs).

Our very own Lou Barnes had this to say on the subject:

“In a fairly short amount of time, no one is going to know how to compute what the next payment is going to be and that’s why it’s important.”

ARMs currently account for over 13% of the market, $1.3 trillion in outstanding mortgages, and many expect those number to increase if interest rates climb higher. If the Libor index is not available, most ARM contracts allow the investor to select a new index.

While that could seem troubling to have a slew of ARMs out there, all adjusting to different indexes, that doesn’t appear to be what the industry wants. Fannie and Freddie are both monitoring the situation closely and a survey of industry professionals shows they would prefer a mandate from regulators.

Investors are also on board with uniformity.

“They [investors] don’t want to deal with mortgage pools where the underlying loans react differently to Libor’s disappearance”, Mr. Barnes added.

Whatever comes out of this, you can rest assured that we will keep you appraised of any changes and if you have any concerned clients currently with an ARM, please reach out and we will see how we can help.


What is LIBOR:


LIBOR is the rate on dollar-denominated deposits, also know as Eurodollars, traded between banks in London. The index is quoted for one month, three months, six months as well as one-year periods.

LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market. A Eurodollar is a dollar de- posited in a bank in a country where the currency is not the dollar. The Eurodollar market has been around for over 40 years and is a major component of the International financial market. London is the center of the Euromarket in terms of volume.

The LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.

The most common quote for mortgages is the 6-month quote. LIBOR's cost of money is a widely monitored interna- tional interest rate indicator. LIBOR is currently being used by both Fannie Mae and Freddie Mac as an index on the loans they purchase.

LIBOR is quoted daily in the Wall Street Journal's Money Rates and compares most closely to the 1-Year Treasury Security index.