Freddie Mac is accusing the big banks of rigging lending rates. While this news broke last year, now Freddie has filed suit against 15 big international banks.
This new lawsuit is just more evidence of bad conduct on the part of the lenders. Ironically though, it likely helped individual borrowers with adjustable-rate loans tied to LIBOR.
LIBOR, or the London InterBank Offered Rate, is the average interest rate charged when banks in the London interbank market borrow unsecured funds from each other. The LIBOR rates are internationally recognized indices used for pricing many types of consumer, home, and business loans – including a large percentage of the adjustable-rate home loans in the United States.
As an analyst at Ocwen in the 1990′s, I helped run the historical numbers to compare and statistically correlate the US Federal Funds rate [the rate set by the Fed] to other rates like LIBOR. Our analysis showed LIBOR led Fed rates up and followed Fed rates down. In other words, the LIBOR rate usually increased before the Fed increased rates, and when the Fed decreased rates, LIBOR would delay a month or two before decreasing.
This meant Ocwen should lend on LIBOR [make loans and charge interest based on LIBOR] – but finance those loans [barrow money] on a derivative of Fed rates. It was brilliant.
I suspect that many other lenders came to this same conclusion as about 80% of the subprime and about 45% of the prime mortgages in the United States are based on LIBOR.
Since the financial crisis, LIBOR was kept at artificially low rates. What this lawsuit means to you is that you may have lost a small amount of money on bonds in your 401k over the past few years, but benefited by paying a lower interest rate on your home mortgage or even student loans if they were tied to LIBOR.
It also demonstrates the antagonistic relationship and adverse interest between the large mortgage lenders who manage the mortgage securities owned by Freddie and Fannie (who helped keep the LIBOR rates artificially low) and Freddie and Fannie themselves (who missed out on the interest they should have received from these investments).
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