Sunday, April 27, 2008

The Libor panic: Homeowners scramble to get out of Libor Based Loans

Bloomberg reported today that the soaring Libor rate is putting even more pressure on homeowners that have a Libor based adjustable rate ARMs. The Libor rate has risen so high, its forcing Libor based homeowners to refinance into a treasury based 30 year fixed that has a higher .61% rate than the Libor ARM.

The reason these homeowners are jumping into 30 year fixed mortgages before their loan resets is because many Libor based mortgages don't have a yearly 2% per year cap like treasury indexed loans. So the payment can change before the loan resets.

As a result, their payments could double before the ARM even resets because the rate on the loan fluctuates based on the Libor rate.

Here are a few nuggets from the article followed by my take:

"Property owners are abandoning adjustable-rate mortgages, or ARMs, to ward off the prospect of higher payments. About 6 million U.S. homeowners, or 59 percent of the ARM market, have Libor-indexed loans, according to data compiled by Santa Ana, California-based First American CoreLogic Inc. The 12-month U.K. benchmark Libor rate rose more than two-thirds of a percentage point in the past month, according to Bankrate Inc. in North Palm Beach, Florida.

``Any ability people might have had to convince themselves that adjustable-rate mortgages don't have risk has completely evaporated,'' said
Edward Glaeser, a professor of economics at Harvard University in Cambridge, Massachusetts, and editor of Quarterly Journal of Economics.

Almost all U.S. subprime loans and 41 percent of prime adjustable loans are linked to Libor, or the London interbank offered rate, First American CoreLogic said. Many Libor-indexed mortgages don't have the 2 percent cap on adjustments that are typical for Treasury-indexed loans, meaning homeowners could see their monthly payments double.
Sleepless Nights

``Like a lot of people I've been awake some nights worrying about what the Libor is going to do,'' said Marc Sherman, 51, of Manhattan Beach, California, who has a $440,000 adjustable loan linked to the U.K. benchmark rate that will reset next March. ``I may be switching to a fixed-rate loan.''

``If you're stepping up to a higher interest rate and, on top of that, paying loan fees, it means you are making a commitment to stay put long enough to make those costs worth it,'' Gumbinger said.

Homeowners with Libor-indexed loans who are refinancing are finding that the cost of fixed loans isn't much higher than adjustables, said Patrick Newport, an economist at Lexington, Massachusetts-based research firm Global Insight Inc.

The spread, or difference between the average U.S. fixed rate and the average adjustable rate for a 30-year mortgage, was 0.61 percent in the first quarter, the closest since the fourth quarter of 2000, data compiled by Freddie Mac show."

My Take:

What a disaster. So all of the subprime loans are based off of Libor. The foreclosure rate is already 25% on these loans and rising. So how do these homeowners react? They jump into a 30 year fixed loan at a higher rate. Can you say nightmare?

This will send foreclosure rates even higher on these loans because the owner now has to pay more for a house that they already can't afford!!!

Bottom Line:

The Libor scandal has forced another explosion in the housing market. I think now we realize why these banks were desperate enough to lie about the lending rates between each other in order to keep the Libor rate lower. They realized it would force more foreclosures costing them billions of dollars that they can't afford to lose right now.

Libor has gone through the roof because the banks now have to tell the truth about lending rates.

The fraud involved in this housing debacle is on a scale I have never seen before. Many of the people involved in this need to be thrown in jail so this never happens again.

Its amazing what greed will do to people. Stay the heck away from buying a house until this disaster plays out.

It just keeps getting worse folks. The housing time bomb took another step towards going KABOOM.


Avl said...

Jeff, where's your eye for art & creativity? Libor based ARMs are an example of the "creativity" that Hank Paulson, Dubya, Christopher Dodd, Greenspan, Bernanke and Volker have all been on record as saying needs to be preserved. In their eyes, the only problems were sub-prime loans, predatory lenders, and fraudulent appraisals. Did I skip anything they agreed was bad?

In their eyes, the Libor connection is a non-issue. So far.
OK, I’m not even being facetious...I have yet to read where the cited above said ARMs pegged to defined metrics like Treasuries or Libor or Prime are bad.
That's why I suspect that somehow someway, this whole mess will repeat itself. I think they fear real reforms will’ throw the baby out with the bath water’.

Jeff said...


So true.

The sad part is there will eventually be some reforms of this fraud.

Then in 15 years or so when this is forgotten, the regulations will be modified and we will do the same thing all over again.

Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!