The Impact of a Market Without the Libor Index

The Libor index will be phased out over the next 5 years after allegations surfaced of bankers manipulating it. This will have the largest impact on adjustable rate mortgage loans (ARMs).

Our very own Lou Barnes had this to say on the subject: “In a fairly short amount of time, no one is going to know how to compute what the next payment is going to be and that’s why it’s important.”

ARMs currently account for over 13% of the market, $1.3 trillion in outstanding mortgages, and many expect those number to increase if interest rates climb higher. If the Libor index is not available, most ARM contracts allow the investor to select a new index.

While that could seem troubling to have a slew of ARMs out there, all adjusting to different indexes, that doesn’t appear to be what the industry wants. Fannie and Freddie are both monitoring the situation closely and a survey of industry professionals shows they would prefer a mandate from regulators.

Investors are also on board with uniformity. “They [investors] don’t want to deal with mortgage pools where the underlying loans react differently to Libor’s disappearance”, Mr. Barnes added.

Whatever comes out of this, you can rest assured that we will keep you appraised of any changes and if you have any concerned clients currently with an ARM, please reach out and we will see how we can help.

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