Adjustable-rate mortgages and the Libor surprise

Adjustable-rate mortgages have typically been tied to either of two indexes, one based on U.S. treasuries, the other on the London interbank offered rate, or Libor. The index is used to determine a mortgage's new interest rate when it is reset, and up until recently, the choice would have made...

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Bibliographic Details
Published in:Economic commentary (Cleveland) 2009-01, p.1
Main Authors: Schweitzer, Mark, Venkatu, Guhan
Format: Article
Language:English
Subjects:
Adjustable rate mortgages
ARM
Borrowing
Economic crisis
Indexes
Interest rates
LIBOR
Loans
London Interbank Offered Rate
Statistical data
Subprime lending
Subprime loans
Treasuries
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Summary:Adjustable-rate mortgages have typically been tied to either of two indexes, one based on U.S. treasuries, the other on the London interbank offered rate, or Libor. The index is used to determine a mortgage's new interest rate when it is reset, and up until recently, the choice would have made little difference. But since 2007, the rates on which the indexes are based have diverged sharply, and borrowers with Libor-based adjustable-rate mortgages are likely to pay more than they would have had their mortgages been tied to treasuries. Moreover, the proportion of Libor-based ARMs has increased significantly, especially for subprime loans.
ISSN:0428-1276
2163-3738