Monday, July 16, 2012


According to Wikipedia, LIBOR is "The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks."  LIBOR has been much in the news lately, because of recent revelations that British banks routinely gamed the system by reporting inaccurate numbers to the reporting agency.  The banks reported interest rates lower than they were actually paying which was intended to make them look healthier than they were (the stronger the bank, the lower the interest rate charged to it).  Ironically, this manipulation worked in favor of some American home owners whose adjustable rate mortgages are tied to the LIBOR rate.  With the LIBOR rate being kept inaccurately (and perhaps illegally) low, interest rates on some adjustable rate home mortgages did not jump as much as they might have.  Of course, the manipulation also harmed others who had investments that were harmed by the lower rates.

LIBOR is a term that appears in thousands of mortgage recorded here at the Middlesex North Registry of Deeds, usually in Adjustable Rate Riders.  For those unfamiliar with it and for others whose home mortgage interest rates are controlled by it but who never bothered to read the fine print, here's the relevant LIBOR language from a mortgage recorded back in January of 2004.

Adjustable Rate Rider
(1-year LIBOR Index – Rate Caps)

Interest Rate and Monthly Payment Changes

Change Dates: The initial interest rate I will pay may change on the first day of January 1, 2007 and may change on that day every 12th month thereafter.  Each date on which my interest rate could change is called a “Change Date.”

The Index: Beginning with the first Change date, my interest rate will be based on an Index.  The “Index” is the one-year London Interbank Offered Rate (“LIBOR”) which is the average of interbank offered rates for one-year US dollar-denominated deposits in the London market, as published in the Wall Street Journal . . .”

Calculation of Changes: Before each Change Date, the Note Holder will calculate my new interest rate by adding TWO AND ONE-FOURTH percentage points (2.250%) to the Current Index. . . .

Limits on Interest Rate Changes: The interest rate I am required to pay at the first Change Date will not be greater than 6.000% or less than 2.250%.  Thereafter, my interest rate will never be increased or decreased on any single Change Date by more than TWO% from the rate of interest I have been paying for the preceding 12 months.  My interest rate will never be greater than 10.000%.

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