LIBOR, or the London Interbank Offered Rate, is a widely used number in the finance world. It is commonly used to set the interest rates on loans, including many reverse mortgages.
For a reverse mortgages and other common types of financial products offered around the world, it’s typical for a lender or originator to carry an interest rate that is stated as equal to LIBOR plus 3 percent, or some other number that’s added to the LIBOR base.
The fact that it’s used around the world as a benchmark for charging interest makes LIBOR a very important interest rate.
It is also a value that can be traded in the derivatives market where billions of dollars are bet on any given day and small moves can have a big impact on profits or losses. The interest rate is determined by a survey, where the British Bankers’ Association calls large banks and asks what rate they are charging in LIBOR market.
The recent scandal with Barclay’s and LIBOR explained
Recently, Barclay’s, the British bank and investment firm, has been fined for manipulating LIBOR. Other firms are still being investigated. The details of the problem were summarized in a Commodity Futures Trading Commission (CFTC) report.
Regulators found that, “Over a period of several years, commencing in at least 2005, Barclays PLC, Barclays Bank and Barclays Capital, by and through their agents, officers and employees located in at least New York, London and Tokyo, repeatedly attempted to manipulate and made false, misleading or knowingly inaccurate submissions concerning two global benchmark interest rates, the British Bankers’ Association’s (BBA) London Interbank Offered Rate (LIBOR) and the European Banking Federation’s (EBF) Euro Interbank Offered Rate (EURIBOR).”
In English? Investors are uncovering evidence of massive LIBOR manipulation by the world’s largest banks in an effort to benefit themselves and their lending divisions.
So, how did Barclay’s do it? Well, the regulators are saying the staff would lie to help set LIBOR rates that would help the firm profit. Regulators estimate that there is about $10 trillion of global debt and $350 trillion in derivatives that is tied to the rate. A small difference in rates, perhaps as little as 0.001 percent, could deliver large gains in a market like this.
Many reverse mortgages are tied to the LIBOR rate, which makes this scandal especially troubling to borrowers and industry professionals such as our firm, Legacy Reverse Mortgage.
The extent of the damages is unknown at this time. Traders could benefit from artificially high and low rates at times so there is every reason to believe that LIBOR was lower than it should have been at time and greater than it should have been at other times. LIBOR generally moves in the same direction as other interest rates so it is very likely that any damage was small.
Reverse mortgage representatives did nothing wrong in this case and were among the victims in many cases. Regulators will continue assessing the damage and more will be in the news in the days and weeks that lie ahead.
We will continue monitoring this news, but remain confident that reverse mortgages offered here in the States have not been affected and will continue to offer a unique and ideal solution for many of our client’s retirement plans.