LIBOR Changes to Effect Mortgages in the United States, According to Andy May, COO, AAFMAA Mortgage Services

Future changes in LIBOR (London Interbank Offered Rate) may cause disruptions in the adjustable rate mortgage market in the United States, according to Andy May, COO, AAFMAA Mortgage Services. According to Chad Bray, New York Times, page b-3 business section, Regulators are replacing LIBOR with “a system of rates that are more closely tied to interest rates on actual loans”. If the military family currently has (or is considering) an adjustable rate mortgage, it is important to understand the benchmark used to adjust the military family’s mortgage rate.

Basically, the errors of past financial participants have caused LIBOR to remain unreliable to the point that regulators are searching for potential replacements. What this means for military families and other mortgage consumers, is that the majority of lending in the United States will shift from a roughly 30 year old benchmark (click here to read the history of LIBOR) to something potentially more regulated and accurate.

What this will likely mean if regulators don’t get it right, the $300 trillion LIBOR market (financial products, derivatives, mortgages, student loans, auto debt) will likely evolve into a higher cost market initially. With uncertainty comes higher costs, as predictability suffers. Higher interest rates on all financial products may enter the market. Over time as investors become comfortable with the new-LIBOR, rates should come back down.

This change is planned for 2021. Some things for consumers to think about include, what does this mean for ARMs that adjust in the post-LIBOR era (and other financial products)? How will documentation that is in place today change? Many of today’s mortgage participants haven’t thought through this new change, which will likely cause mortgage adjustments to increase variability. According to the NY…

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