Why Some Homeowners Are Cheering the LIBOR

One reader contacted me last week with her good news. She said, "Have a look at the letter from my bank. It looks like good news to me!"

I later found out that this reader originated her adjustable rate loan five years ago on a new California home purchase. She was aware at the time that the interest rate would adjust in 2009. "Back then, 5 years seemed like a long time. I can't believe it is now 2009."

I quote directly from her bank's letter with her permission:

This notice is to inform you of upcoming changes to your adjustable rate mortgage loan interest rate and payment. The rate change date for your loan is July 01, 2009, with a new payment effective date of August 01, 2009. The next adjustment will occur in 6 months.

The installment due on your loan will be adjusted from $1,329.83 to $886.55.

The index value used to determine the interest rate has changed from your origination rate to 1.24000%. The current index value was published on 06-01-09. This is the selected index value for the index known as the "6 MONTH LIBOR 1ST BUSINESS DAY (WALL ST. JOURNAL)." Effective with your August 01, 2009 payment, your interest rate will be adjusted from 5.25000% to 3.5000%.

If you have any questions regarding this notice please contact our Customer Service Department.

She further commented, "Even though the market value appears to have dropped for my home in the last five years, this monthly adjustment to my budget is quite welcome. I may use some of that $450/month toward a new car payment or toward paying down additional principal on that mortgage. This month, I am just going shopping."

LIBOR index rates continue their historical lows. This week's 6 month LIBOR is down even further at 1.16% and the 1 month LIBOR at 0.32%. It appears likely that our cheerful reader may have additional monthly funds available at her next adjustment six months from now.

When ask what she would do with even a further decrease in her monthly housing costs in late 2009 she said, "It could be a very Merry Christmas."

If anecdotal news and letters like this become at all wide-spread, it could mean further gains for retail summer sales, continued foreclosure declines, and may give the beleaguered auto industry something to really cheer about.

Comments

[Jimmy K:]

maybe she could buy a jetski... or a big screen plasma TV.

Jun 22 07:46 AM

[Wesley Mouch:]

I do not view the story presented above as good news at all. A decreased monthly payment due to massive central bank interventions in credit markets is not sustainable, and the belief that the economy as a whole will benefit from a consumer spending this borrowed wealth is troubling to the core.

What will happen when the LIBOR rate returns to "normal", i.e. when LIBOR reflects the risks of loaning money to overextended entities? The continued slide of housing prices in the US will reveal insolvency on the ARM borrowers that is cleary present today. When the mass of borrowers is large enough, what rate would you charge them collectively if you were lending them your money?

The example above is not evidence of a recovery, but a warning of future writeoffs.

Jun 22 08:17 AM

[Old Trader:]

I believe it was Bloomberg that had a story late last week, that the number of banks that determine LIBOR was going to be raised. The article ended by saying it was thought the effect would be to raise the Libor rate; not good news for the happy homeowner mentioned in the article. Hope she enjoys her good fortune while it lasts.

Jun 22 09:05 AM

[nobull:]

So when rates go down, PARTY!!! Rates go up, go whining to govt - its all banks fault!!!!

Jun 22 09:34 AM

[Larrysyr:]

The rate is going to be adjusted again in 6 months. It really can't go much lower. This "reader" should be setting aside a rainy day fund for the inevitable rate increases to come before she goes shopping.

Jun 22 09:57 AM

[econjunkie:]

"...Going shopping" on this kind of news is what got us here in the first place. Damn this myopia.

Jun 22 11:39 AM

[Duude:]

Doesn't her response do a great job outlining why American consumers are over their head in debt? She mentions she might take on a new car payment or pay down her principal on her mortgage but then affirms that she's going shopping. She still has an adjustable rate mortgage. Her first choice should have been to opt to turn her adjustable rate mortgage into a fixed mortgage even if her near term mortgage rate might turn out to be higher. If that isn't possible, she ought to pay down the principal or eliminate other consumer debt not mentioned. But no. She decides to go shopping. You can't help people. They will always opt for pleasure over fiscal discipline forgetting how precarious their situation had been over the last two years.

Jun 22 02:00 PM

[Mad Hedge F...:]

People who had LIBOR loans got killed last year. Since I have been pelted daily with predictions that residential real estate has bottomed for the last 18 months, I feel a public duty to tell that is just not the case. Now that the state and federal moratoriums are off, foreclosures are accelerating. There are over a million Alt-A loan resets about to hit the fan. Since many owners will not see positive equity in their homes in their lifetimes, banks are seeing more walk always. The run up in mortgage rates from 4.5% to 5.5% has yet to hit the market. Some 18 million homeowners divert 50% of their incomes to pay for housing, double the 25% that is considered healthy, and many of them are losing jobs. While the volume of units sold has rebounded, the action is dominated by speculators, flippers, and bottom feeders bidding for properties at 10-40 cents on the dollar, not exactly a sign of health. Call me when Ozzie & Harriet Nelson come back to the market. I listen to industry insiders call the bottom of the Japanese real estate market for 15 years, until they finally died, and the market is still a fraction of its 1990 high. I thing we are closer to the bottom than the top in terms of price, but closer to the top than the bottom in terms of time. You can take that to the bank.

Jun 22 02:15 PM

[dirtyharry:]

Your reader should be classified as just another idiot that never learns a lesson. Like a druggie who has been missing her crack for awhile, at the first opportunity she's ready to blow it all again instead of recognizing this as a chance to protect herself from further downturn.

Jun 22 02:20 PM

[herschel34:]

so what would be a sign of a recovery. you people are always damned if you do and damned if you don't. Whatever...i don't opine either way, but you guys who always try to turn positive info into negative to support your views are inherently suspect (not to mention immature).


On Jun 22 08:17 AM Wesley Mouch wrote:

> I do not view the story presented above as good news at all. A decreased
> monthly payment due to massive central bank interventions in credit
> markets is not sustainable, and the belief that the economy as a
> whole will benefit from a consumer spending this borrowed wealth
> is troubling to the core.
>
> What will happen when the LIBOR rate returns to "normal", i.e. when
> LIBOR reflects the risks of loaning money to overextended entities?
> The continued slide of housing prices in the US will reveal insolvency
> on the ARM borrowers that is cleary present today. When the mass
> of borrowers is large enough, what rate would you charge them collectively
> if you were lending them your money?
>
> The example above is not evidence of a recovery, but a warning of
> future writeoffs.

Jun 22 07:15 PM

[pepe:]

Borrowers who have their 5/1 ARM interest rate tied to the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year, are experiencing the same degree of euphoria as your reader reported. My 5/1 is adjusting from 5.25% to 3.25% on August 1, 2009. The considerable reduction in my monthly payment will help meet other monthly and unexpected living costs payable during the coming year. Hopefully the inevitable rise of our future adjustable rates will be slow in coming.

Jun 22 08:44 PM

[M.E.Mom:]

I hope the benefited borrower does something smart with the money. My husband and I are benefiting from almost the same adjustment. Most borrowers who are also have a max 1% every six months increase on their rate and a capped total interest rate that limits exposure regardless of how high that LIBOR rate goes. We'll be using our newfound wealth to build a nestegg, payoff debts and hoping that by the time LIBOR is high again that home prices will have gained a bit and we'll be able to get ourselves in to a nice 15 year loan or sell the house without a loss if we cannot refi and afford it. We'd like to use the extra $$ to pay down the mortgage, but with such an unsettled market we just don't think that's the best idea - I hear a flushing sound when I consider the option. Cash is King. So - for us the best plan is to make/save hay while the low LIBOR sun shines and prepare for rainy days ahead - cuz I'm pretty sure they're coming.


On Jun 22 02:00 PM Duude wrote:

> Doesn't her response do a great job outlining why American consumers
> are over their head in debt? She mentions she might take on a new
> car payment or pay down her principal on her mortgage but then affirms
> that she's going shopping. She still has an adjustable rate mortgage.
> Her first choice should have been to opt to turn her adjustable rate
> mortgage into a fixed mortgage even if her near term mortgage rate
> might turn out to be higher. If that isn't possible, she ought to
> pay down the principal or eliminate other consumer debt not mentioned.
> But no. She decides to go shopping. You can't help people. They will
> always opt for pleasure over fiscal discipline forgetting how precarious
> their situation had been over the last two years.

Nov 18 04:15 PM