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How does the LIBOR scandal affect my mortgage?

Posted by  on Aug 01, 2012
 

Q: I've been hearing a lot lately about big banks manipulating an interest rate called LIBOR. The name rang a bell, so I looked at the papers for my adjustable-rate mortgage, and sure enough, the rate is based on LIBOR. Does the manipulation that's been going on mean I might have been overpaying on my mortgage rate; and if so, should I be getting ready to sue my mortgage company?

A: Many mortgage lenders base adjustable-rate mortgages on a premium over LIBOR, so you should continue to follow the LIBOR manipulation scandal as it unfolds. However, there are three reasons it's likely to have minimal impact on current mortgage holders:

  1. Historically, variations in LIBOR have been slight, so manipulations would have had a minute impact on mortgage borrowers - in the neighborhood of a couple hundredths of a percentage point, and possibly in offsetting directions over time. That's enough for banks to profit on highly leveraged derivatives, but not enough to materially affect individual mortgage borrowers.

  2. More recent manipulations may have been more significant, but have focused on understating LIBOR. From the financial crisis onward, it seems some banks wanted to conceal their true borrowing costs, so they understated their responses to the survey on which LIBOR is based. This would make LIBOR-based mortgage rates artificially low, not artificially high.

  3. Chances are, a class-action lawyer will sue for you if there were any damages. The good news is that a class action can make it cost-efficient to sue in cases like this; the bad news is that once legal fees have been deducted and settlements are spread among participants in the suit, you might be lucky to buy a cup of coffee with the proceeds.

This doesn't mean that the LIBOR scandal is insignificant. It reveals serious ethical and structural problems with the financial system. It is an ugly situation, but in this case it is unlikely to have really cost you any money as a mortgage borrower.



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