Libor, We Knew You All So Well

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Libor, We Knew You All So Well

For so many years when a Mortgage Loan Originator was asked, “What index is used for this adjustable loan?”

Most of the time, the answer was LIBOR.

Now there could be others such as 11th District Cost of Funds, 10 Year Treasuries, Moving Treasury Average. That was not their purpose.

There Was A Scandal A Few Years Ago

The London Banks manipulated the rate. They massaged it. They mangled it.

In short, they lied. Can you imagine a bunch of banks not following the rules?

How Could They Do This?

The rate was not calculated by checking loans made. Each bank sent a letter to the Regulator stating at which rate they lent the prior month. Very easy to build fake results.

And they did it. And they did it for many years, and this rate affected American homeowner’s loans. Scandal.

Recently, It Was Announced That The LIBOR Rate Will Not Be Used

Well, it will be phased out over the next five to seven years.

This leads to an interesting question: If a homeowner has a loan based on this rate and it is to change after 7 years, what rate will be used?

No one knows at this time. If someone tells you that they do know, they are lying.

Most loans were written considering the fact that LIBOR would disappear. But they did not mention a replacement, instead the loans stated that a comparable rate will be selected.

Fannie and Freddie are “monitoring the situation closely and will notify everyone when something is determined.”

Several banks have expressed a sentiment hat the Feds just make a decision and pick one.

There is an Alternative Reference Rates Commission that has been studying this scandal since it happened. They are recommending something based on “repurchase agreements backed by treasury securities.”

Whatever that means.

This Is Very Important

Some of the indices are a bit lower than LIBOR. Just a .10% difference could mean millions to banks in interest payments and, on the other hand, millions to the borrowers.

London Banks. Were they not featured in “Mary Poppins” with Dick Van Dyke as the Chairman? Imagine if real live banks got together to cheat.

Next, we will hear that there is gambling in the Casino.

4 Responses to Libor, We Knew You All So Well

  1. Pat August 13, 2017 at 4:06 pm #

    I really enjoy your newsletter but lately I have not taken the time. I recently renewed my license and received your new book. I love it and tell my friends in the office I will have at my desk if they have any questions regarding real estate issues. It is easy to read and understand. I guess your not a lawyer, huh.

    • Duane Gomer August 15, 2017 at 4:52 pm #

      Thank you for the comments; I have another book that we put together that you should enjoy.

      I will have my office reach out to you.

  2. Ken Truitt August 14, 2017 at 1:28 pm #

    Thank God for LIBOR. I’ve been a licensed broker since 1986 (now retired) and had a 5/1 Libor for 12 years. Start rate was 1.25% less than 30 FRM. Year 1 adjusted up .8% and then it continued to drop for the remainder of the time we had it, 2.83% when we sold in 2015. The only other loan that performed better was a Wachovia COSI loan on another property (except for the 3 years that Wells Fargo cheated on the index). At the end of 9 years that rate was 2.71%. The money saved on both due to reduced payments and accelerated principal accumulation was substantial.

    • Duane Gomer August 15, 2017 at 4:50 pm #

      Yes, according to what I have read, when Libor lied about the rates, it benefited the borrowers; and yet the lenders stayed with them. Never have understood lenders and I do not care what many of my friends say, “They need supervision and regulation, they are never to big to fail, and sometimes they should not be too big to jail.”

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