Bank fears pushing ARM rates up

Rise in LIBOR will cost homeowners

The value of stocks traded on global exchanges has plummeted by an estimated $25 trillion this year, but the bigger worry for many analysts is the continuing fear banks have about lending money to each other.

A telling indicator of those fears is the rise in the London Interbank Offered Rate, or LIBOR, which tracks the rates banks charge each other for loans in 10 currencies for durations ranging from overnight to 12 months.

According to the British Banking Association, LIBOR is used to set rates for financial products such as loans that total $350 trillion worldwide. While loans between many U.S. banks are tied to the federal funds overnight rate, the increase in LIBOR has ominous implications for homeowners with adjustable-rate mortgage (ARM) loans that have reset or are soon facing resets.

Nearly all subprime and alt-A adjustable-rate mortgage (ARM) loans are tied to six-month dollar LIBOR, which hit 4.4 percent today, up from 3 percent on Sept. 15. Most prime ARM loans, including those backed by Fannie Mae Freddie Mac, are also linked to six-month dollar LIBOR.

Analysts at Citigroup Inc. said in a research note this week that introductory rates on 1.8 million ARM loans have already expired and are now tracking with LIBOR or other benchmarks, and that 121,000 mortgages will reset for the first time next month. Another 3.7 million ARM loans will reset after that.

According to a Bloomberg News report on the Citigroup research note, subprime ARM borrowers facing their first adjustable payment would see their monthly payment go up 18 percent based on six-month dollar LIBOR rates on Sept. 30, compared with a 10 percent increase they would have seen if LIBOR had remained at the 3 percent level reported on Sept. 15.

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"America’s homeowners are going to get uncomfortably familiar with ‘LIBOR’ starting next month," Citigroup analysts said.

Bloomberg reported today that more than $25 trillion has been erased from global equities markets in 2008, and that the three-month dollar LIBOR rate has jumped to the highest level since Dec. 27.

Central banks around the world cut interest rates Wednesday out of concern about the the tightened lending practices between banks (see story).

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