That Pesky Libor Rate Hits 8-YR High
A: It's a misperception out there that borrower's lending rates and adjusted mortgage rates are based on fed funds target of 5.25%; not so as I have pointed out before here on urbandigs.com. Instead, lending rates are based more on the bond market while all those adjustable ARM loans are based on the LIBOR rate, which is now at 8 1/2 year highs. That means if you have an adjustable rate mortgage and the fed cuts the target rate, you MAY NOT feel any relief! If LIBOR continues to stay at these heightened levels, resetting ARM's will face significantly higher monthly payments when the lock in expires. Lets discuss.
This is important because many resetting adjustable rate mortgages are based on the LIBOR rate. I discussed LIBOR previously in my post titled, "Global Feds, LIBOR Rate, & Fear Continues" back on AUG 10th where I stated:
It's an index that is used to set the cost of various variable-rate loans, including credit cards and adjustable-rate mortgages.
Recently, this LIBOR rate has been moving higher; a bad sign for all those with adjustable rate mortgages that are resetting to current LIBOR rates. If you are a resetting ARM holder, you may see your monthly payments jump even higher.
According to an article today in Forbes.com:
The costs for banks of borrowing money over a three-month period hit another eight-and-a-half year high today as the credit crisis sparked by losses from US sub-prime mortgage investments made banks increasingly unwilling to lend money.That is the 3-Month UK sterling LIBOR Rate. The overnight dollar LIBOR fixing rate rose to 5.65%, while the overnight Euro LIBOR rate were fixed at 4.14%. Let's see how any future fed action or gov't action may help to relieve the rising LIBOR rates for the estimated $355B worth of home loans set to reset in 2008 alone! And from what I am hearing, that is a conservative estimate. I recall reading in another source that the expected value of home loans set to reset in 2008 was closer to $600B, but for the life of me I can't remember where I read that.
The London interbank offered rate (Libor) fixing for three-month sterling deposits -- the rate at which banks lend to each other -- jumped to 6.79750 pct, the highest level since late 1998 following the collapse of the hedge fund Long Term Capital Management.
Something to keep an eye on as more distressed homeowners who can't afford their payments means more defaults, more foreclosures, more risk in mortgages, less interest in secondary mortgage markets, even tighter lending standards, etc..The trickle effect is a long one and I think it is safe to now say that 2008 poses the most important test for housing in the past 15 years or so.