Rate Outlook For The Week Of July 30th: The Libor And You: How It Affects Mortgage Rates For New J

The recent LIBOR scandal has wreaked havoc in financial markets

, but interestingly enough, the public outcry in the US has been surprisingly muted. This may be because an insufficient amount of understanding regarding the LIBOR is present, and/or because of the originating place of the problem in England and in Europe that it may interpreted as simply a European concern.

Thats not the case at all. The LIBOR, which stands for the London Interchange Offered Rate, is a baseline rate that sixteen banks deploy in setting rates to the general banking public, but, it is a rate that many mortgage banks in the US utilize in setting rates. This is also a short-term baseline interest rate for many US-based credit cards, commercial loans, and even, student loans. Ideally, the LIBOR presents short-term liquidity for many financial institutions supplied by the provision of excess cash by the larger, powerful banks of the LIBOR, in return for the short-term interest rates charged by these banks. This trickle down of liquidity benefits smaller banks and lending institutions that can then lend to the general public.

Accordingly, a very real and likely negative trickle-down effect can take place when discovery of such scandalous information takes place as well, as it becomes a problem that affects global citizens, certainly New Jersey citizens. Interestingly enough, a New Jersey-based bank, the Berkshire bank has now filed a lawsuit, alleging fraud, as the sixteen British banks that set the LIBOR has been accused of artificially manipulating this rate from 2007-2010.

This wont be the last or the sole litigant. "Libor could well be the asbestos claims of this century," said James Cox, a law professor at Duke University in Durham , N.C. "Misreporting an index used around the world" has "ginormous" ramifications, he added. Many legal analysts speculate that the ultimate expense from a global pandemic of class-action litigation charging the banks of damages caused by rigging rates could be in the hundreds of billions. Whos going to pay for these hefty expenses? Yes, it will be the banks at fault of course and rightfully so. But, who will then pay when these banks are unable to pay the fines and legal expenses? These banks are all globally based, and as As TARP and the QE and QE II programs would readily indicate, the rhetorical answer to this question would then be: you and I the taxpayer. Not only would we be paying through higher taxes, wed be paying these costs in our future mortgages both in terms of higher rates and in terms of stricter underwriting, making it more difficult to qualify for a favorably priced mortgage.

James M. Di Piazza

by: James Di Piazza

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