Vail mortgage column: Banking changes will impact millions of homeowners
July 28, 2017
If you have an adjustable home-mortgage loan, you might have heard the term "LIBOR," which stands for the London Interbank Offering Rate. It's basically the rate that banks lend money to one another and has become a benchmark in the financial industry for all kinds of transactions to the tune of about $350 trillion dollars in bonds, loans, credit cards and CDs. It has been a world standard for nearly 50 years and for decades proved a reliable benchmark of risk and the cost of doing business for banks.
There are numerous LIBOR indexes. Most common are the three-month and the one-year, which reflect the length of the loan being offered.
When your adjustable mortgage adjusts, it moves to the current value of the specified index plus a margin or "markup" of usually 2 percent to 3 percent. The LIBOR is so huge that a tick up or down of 1/100th of a percent is collectively worth millions of dollars a day, depending on which side of the table you are on.
“Overall, I don’t think homeowners should be alarmed at this change, indeed the scrutiny by government watchdogs to pick something that is fair will be intense, and it should be a good thing overall because those traders who rigged the game never had the best interest of consumers at heart.”
Lenders, generally but not always, would love to see it go up, and borrowers wish it might go down. Those "lenders" who heavily borrowed others' money to lend out are worried that an increase in their cost of money might hurt earnings.
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But in 2014, a scandal started unfolding about the LIBOR that it might be rigged. One would think that such an important index would be heavily scrutinized and regulated by government oversight, but the truth was, it was determined by the British Bankers Association, a trade group made up of primarily lenders, many of who had vast corporate fortunes riding the tide of the LIBOR.
The result was too much to resist, and the game of the day seemed to become how to manipulate the LIBOR to one's advantage, and there were skilled players making seven- and eight-digit salaries doing just that. Governments across the globe suddenly woke up to what many claimed had been an elephant in the room for years, and investigations were held and indictments were handed down and lawyers started eyeing that new beach house.
scrapped as an index
An American trader working for the United Bank of Switzerland was the only one worldwide who went to jail, and dozens of others worldwide (who must have had better lawyers or deeper pockets) beat the rap. Most major banks paid hundreds of millions in fines, and everyone got back to work and governments worldwide vowed close scrutiny of the LIBOR.
But to fast forward, the LIBOR is about to rightly be scrapped as an index reportedly by 2020, and millions of U.S. homeowners will get a notice over the next few years that their home loans are now tied to a new index. The most likely candidates might be a U.S. treasury index, which is pretty hard to manipulate because it involves publicly traded securities.
Overall, I don't think homeowners should be alarmed at this change, indeed the scrutiny by government watchdogs to pick something that is fair will be intense, and it should be a good thing overall because those traders who rigged the game never had the best interest of consumers at heart.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.
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