Libor is going away. What does that mean for your mortgage?

Libor, the London Interbank Offered Rate, is being phased out by lenders — and that could mean a change in the interest rates paid by millions of existing home mortgage borrowers in the U.S., if the transition to another benchmark isn’t done equitably.

Libor is a financial instrument used to determine interest rates on many loans, including student loans and of adjustable-rate mortgages.

Lenders have wanted to move away from Libor for many years because of its thin representation of surveyed banks responding to determine the state of interest rates. It is calculated through interest rate submissions by major banks.

Concerns about Libor came to a head in 2012 when a series of investigations revealed collusion among banks to manipulate rates to their benefit. Libor came under U.K. regulatory oversight soon after.

Many adjustable-rate mortgages are currently based on Libor, plus a set number of percentage points.

What will replace Libor as the default rate benchmark for determining periodic adjustable-rate mortgage adjustments?

“The Federal Reserve System has led a conversation in the U.S. with financial market participants,” Mike Fratantoni, chief economist at the Mortgage Bankers Association in D.C., told WTOP.

“They are recommending something called SOFR, the Secured Overnight Financing Rate, which is monitoring the market for overnight lending of U.S. Treasury Securities,” he said.

Because SOFR is generally a marginally lower rate that Libor, it could mean adjustable rates go down, or at least not up as much. But that is also unlikely. There are both borrowers, and the investors who own those loans to protect.

“Trying to balance, not to disrupt the consumer and give them a rate or a payment that would (be) different than they would expect under a Libor benchmark, but also not to disrupt investors who, when they’re receiving these payments, going in thought it was going to be based on Libor as well,” Fratantoni said.

Libor will be phased out entirely by 2022.

In the meantime, adjustable-rate mortgages being underwritten now include language that says the lender may change the benchmark used to determine rates in the future.

“It is incredibly important that consumers be aware that this change is coming just a few years down the road, that they are going to be getting a notice or disclosure from their lender that their benchmark is changing,” Fratantoni said.

“It is good for them to understand the reasons behind this, but for also for them to understand that the goal is to move to a more stable and reliable benchmark over time,” he said.

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