The LIBOR index comes up once in awhile in conversation especially when providing a multifamily investor a rate quote. Multifamily loans and investing include the LIBOR index routinely now.

Years ago, when multi family investments were less common, investors rarely asked how LIBOR worked.  Banks rarely used the index when working with bank customers unless they were corporate. 

LIBOR officially is the London Interbank Offered Rate created in part by the British Bankers Association and Bank of England going online in 1986.

The index is in simple terms the rate that the 200 international member banks will lend to each other.  LIBOR is more costly than borrowing funds from the Feds but in the old days, banks would only borrow from the Feds as a last resort. Shortly thereafter, the Regulators would come knocking.  Come to think of it, banks only borrow from the Feds today as a last resort today as well but the Feds are just too busy paddling to come knocking. 

The index rocked along out of the consumers’ eye until it became a popular index tied to borrowers with less than stellar credit.  Many of the subprime mortgages you have become aware of are based on LIBOR plus 6% which was a standard quote.

The index changes daily creating too much change for prime credit borrowers who prefer a more stable index like the Prime rate. 

However, it has slowly crept into the main stream lending programs as the index which is used after a fixed rate term has expired.  For instance, a multi family investment loan may be a 5 year fixed term with a margin (as in a profit margin) of 2.75% over the 6 month LIBOR rate.  In effect, you would be paying 2.75% over what a bank could borrow money from another bank.  

Now if they could only find a bank to loan them the money.

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