Chances are your mortgage interest rate is tied to the Libor. That means that virtually everyone you know also has a mortgage tied to the Libor. When the Libor rate increases...so will your payments on your adjustable rate mortgage.
The biggest jump in the London interbank (Libor) lending rate in at least seven years could wreak further havoc on the U.S. housing market and there's nothing the Federal Reserve can do about it.
About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to the London Interbank Offered Rate, or Libor, according to First American CoreLogic in Santa Ana, California. Today's daily rate more than doubled, with smaller gains in the one-week and one-month rates, as lenders demanded higher compensation for risk after Lehman Brothers Holdings Inc. collapsed and the value of American International Group Inc. fell 84 percent in a week.
Daily Libor rates are used to calculate monthly adjusting mortgage resets, including some so-called "option ARMs" that allow borrowers to defer payments by increasing mortgage balances, said Keith Gumbinger, vice president of Pompton Plains, New Jersey-based mortgage research firm HSH Associates Inc. More importantly, gains in the shorter-term Libor rates may signal increases to come in the three- to 12-month indexes used to calculate the majority of ARM resets, he said.
"If this is more than a flare, if the rate remains high, there is no doubt it will have an effect on resetting mortgage contracts in the U.S." Gumbinger said. "Even a small bump in the one-month rate will be additional stress on the marketplace."
Home loan rates tied to Libor are beyond the reach of Federal Reserve Chairman Ben S. Bernanke and others on the Federal Open Market Committee, which today left its benchmark interest rate unchanged. Libor-indexed loans, including the subprime mortgages that helped spark the global credit crunch, have interest rates that are set by London bankers who report to the British Bankers' Association.
ARM Defaults
Forty percent of subprime adjustable-rate mortgages were either in foreclosure or had late payments in the second quarter, according to the Mortgage Bankers Association in Washington. For prime adjustable-rate home loans the combined rate was 12 percent and for mortgages of all types it was 9.2 percent, the trade group said in a Sept. 5 report.
U.S. home prices probably will tumble through 2010, Freddie Mac said in a forecast yesterday. The S&P/Case Shiller Home Price Index likely will drop 13 percent this year, 4.3 percent next year, and 2 percent in 2010, the MacLean, Virginia-based mortgage buyer said. That's on top of an 8.9 percent drop in 2007.
Combined sales of new and existing homes probably will fall to 4.92 million this year, 34 percent below the all-time high of 7.46 million in 2005, Freddie Mac said in the forecast.
The overnight Libor rate in U.S. dollars soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The one-week rate rose by more than a percentage point, to 3.88 percent from 2.49 percent on Monday, and the one-month rate increased to 2.75 percent from 2.5 percent.
Mortgage Resets
Many Libor-linked U.S. mortgages don't limit the size of a loan's first adjustment, with caps of 2 percent on subsequent changes. That means a monthly mortgage bill could double or even triple when it first resets.
"If the Libor market seizes up and stays that way, it's going to complicate everything," said Bill Fleckenstein, president of Fleckenstein Capital in Seattle. "What you are seeing is the unwinding of the financial system as we know it."
Some content provided by Bloomberg and Tim and Julie Harris
Comments(1)