March 28, 2019
What is LIBOR, and Where is it Going?
LIBOR—the London Interbank Offered Rate—is a benchmark interest rate set by some of the largest financial institutions on a daily basis. Based on this rate, these banking institutions lend one another money. As such, LIBOR underlies the rates at which those banks (and others) then lend money to other people and organizations, including end-users such as homebuyers. It’s one of the cornerstones of the international financial market. But it has been subject to manipulation and scandal in the fairly recent past, and regulators have determined it will be phased out in 2021. What it will be replaced with is yet to be determined.
While there are a number of different LIBOR rates, the one most often referred to is the number describing the rate at which a bank might be able to borrow dollars for a three-month period. The way this LIBOR is determined runs as follows: Each day a question is asked anonymously of these major financial institutions: “What interest rate would you have to pay to borrow money from other banks?” The responses are recorded, the highest and lowest responses are removed, and the rest are averaged. This average number defines the LIBOR rate.
In the housing market it is variable interest rates that are most subject to the fluctuations in LIBOR, because usually LIBOR is the determinant around which the rate’s variations are calculated (generally it’s LIBOR plus a certain number of percentage points).
Because of the subjective nature of the question asked to determine the rate (which is based on what the banks think they should be charged rather than the rate they have been charged earlier in the day), regulators have determined that LIBOR is too susceptible to manipulation (and indeed, the scandal that occurred in 2009, prior to which it has been alleged that some banks were submitting rates that were requested of them by traders in order to artificially affect the rate, if true, would indicate this is so). As such, LIBOR is to be phased out. Recent meetings have been undertaken to settle on a regime to replace LIBOR when the time comes. It remains to be seen how this will affect adjustable rate mortgages in the housing market.
Whether you’ve secured a LIBOR-based adjustable mortgage or not, if you’re shopping around for title insurance in Florida, or in our other service area states of Rhode Island or Massachusetts, contact us to see how we can help. Topouzis & Associates, P.C., is backed by multiple underwriters, staffed by residential real estate specialists and ready to help you avoid costly delays and streamline your residential transactions.