Fed Targets LIBOR to Lower Mortgage Rates

Today’s Wall Street Journal quotes estimates from the Federal Reserve Bank of New York that 99% of subprime adjustable-rate mortgages (ARMs) facing reset are determined by the 6 or 12 month US Dollar (USD) LIBOR rate. Half of non-subprime ARMs and jumbo loan ARMs ($417K+) are also based on USD LIBOR. This is why despite the Fed’s rate cuts, the interest rates on many American loans are not declining.

LIBOR (London Interbank Offered Rate) is the interest rate banks charge each other for short term unsecured loans. The real purpose behind today’s Federal Reserve establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank is an attempt to lower the USD LIBOR rate.

LINKS:
Wall Street Journal: “Why Borrowers May Not Benefit From Rate Cut”
http://online.wsj.com/article/SB119742003788522159.html?mod=pj_main_hs_coll

Federal Reserve Press Release
http://federalreserve.gov/newsevents/press/monetary/20071212a.htm

British Bankers' Association LIBOR FAQ
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=225&a=1416

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