What LIBOR is and Why You Care

Kevin, Certainly others in this forum can provide information, as well. Allow me to take a stab at an explanation. In Congress's infinite wisdom at an attempt of social engineering, lenders in all forms were required to underwrite and offer MANY different mortgage programs. ARMS are underwritten differently based on the lender, however, in approximately the last 10 years, the adjustable rate mortgage is the instrument that allowed the lender to recover dollars from the borrower that did not make a down payment or other creative techniques by which the borrower managed to get into a home. The original ARMs were written to adjust with the market and with caps, as you suggest, or underwritten incrementally. However, depending on the level of risk assumed by the lender, the ARM may or may not be underwritten with caps. Some, and arguably, most of the trouble faced today is based on the vast number of creative mortgages written by the lender, based on the highest risk presented by the borrower. Hope this helps and is not too much information.

Can someone answer a simple question? I was under the impression that ARM's are mostly limited to adjusting only a few points above their current rate during an adjustment period. So if my ARM is currently set at 5% and I enter an adjustment period wouldnt most states restrict the adjustment to no more than maybe 3% above my current rate? By the way, no, my mortgage is a 15 year fixed, Im just curious why so many people with an ARM are failing.

Well here comes another round of foreclosures. Most subprime loans are tied the the libor index and have a margine of 6% or higher.. That means that their mortgage will reset to over 12% to 13% if they were to reset today. More bad news for the housing industry

"Letting the free market work out." I really think that very few people on main street understand what that means and how devastating that could be to joe six pack on main street if the govt doesnt step in. The capital markets are driven by confidence -- confidence that a given counterparty will be able to make good on its financial obligations and that it will be around tomorrow -- and that confidence has been destroyed. Everyone is to blame -- the govt for believing that owning a home in the US is a god given right, capital providers for creating these esoteric CDOs and securitized products that only the best math PhDs can understand, and the people who took out the loans for wanting the American Dream today because they could without taking into account for whether the loan they took out made sense on any planet under any mathematical computataion. Providing a potential $700 billion backstop will provide the desperately needed confidence in the markets, and will take the seeming arbitrariness around who is too big to fail out of the equation. Is it fair for Joe 6 pack to lose his house (with a conventional normal mortgage) because he lost his job because his co has to file bk due to the fact that his company's cost of debt tripled and it couldnt afford its payments? How is that better than the clown who makes $30k per year who lost his house because his $400k option adjustable ARM adjusted? I agree with J dillion that trying to jam what I call the potential "$700 billion investment by the government in US hard assets" not a "bailout" as all of the pundits call it by pointing to "losing" a trillion dollars yesterday is wrong. Any pedestrian on the street knows that the stock market is a representation of value and capital is not gained or lost until a stock or bond is sold. The stock market is merely a scoreboard that is the accumulation of investors' perception of the present value of an individual company's free cash flow. For J Dillon's aedification, we arent "sending $700 billion to the government" -- they already have it or will borrow it, and the $700 billion wont be "gone." where do you think it is going? The govt will be buying hard real estate assets at deeply depressed prices, and will sell the assets in the future (most likely at higher prices) once the market has rationalized, the economy has stabilized and the hysteria has dissipated and confidence in our capital markets has returned. Heres what I dont understand, the govt already owns Fannie & Freddie, which has over 50% of the US residential mortgage loan market, so if the govt buys mortgages from failing banks, are they only buying non-fannie / freddie loans?

How do you know what I care about? I can't believe how out of touch you are with the people you are reporting to. I don't care about it being harder to get credit! My life does not revolve around it. This is the same for a lot of people. In addition, many of the people who need credit to make ends meet know that they shouldn't be in that situation. Credit to consume ought to be thrown in the garbage. And by the way, if you are a responsible person, who saves to buy, or needs credit to PRODUCE valuables, you can still get credit!

Brian, Great job keeping this in front of everyone! Yes, Banks are "bidding (in this case offering)to miss". The Banks do not want to trade at all because they do not know what their inventory will be valued and thus impacting their "cap-ratios". Question: does anyone believe that if Banks get some of these structured products off of their balance sheets that they'll jump right back into making credit available? **Did Trapper John just call Paulson a "moron" and Grasso "stupid"? :)

Brian, please elaborate on the your interest rate comparison calculation. Libor going from 4% to 6.88% is an increase of 72%, a credit card going from 15% to 45% is a 200% increase. How is that the same? This bailout is absolute garbage. Who in there right mind thinks that saving the companies that created, purchased or sold these securities (SUB PRIME the name says it all) should be saved! Saved from what their own greed and ignorance? Example: I built a home in 2007 and went to an unnamed bank to work on a construction loan that would be converted to a mortgage upon completeion. I gave the loan officer my financial info in a large envelope and he said "are you sure you want me to open this up". I asked why and he said I can just do a "stated earnings" loan for 1/2 point higher interest. Stated earnings is just what it sounds like, tell them how much you make without verification and they give you the loan. THESE ARE THE PEOPLE THAT WE SHOULD HELP? WAKE UP. The markets need to stabilize themselves and another infusion of cash will make no difference. If the government is compelled to throw good money after bad then convert people ARMs to no-cost low fixed rate 30 year mortgages and set conditions on the resale of the home where the federal government shares in the gain (if any) on the sale of the home in the future. Simply put a lien on the home so when it is resold the lien shows up and must be satisfied in order to have a clear deed. This system will track itself, addresses the root of the problem and would slow down foreclosures. The second step is to get rid of this Compromised, Spineless, Morally Bankrupt, Politics before the People bunch of nitwits running our country. Their performance is absolutely PATHETIC. If the government does this deal than the $700 billion is just the beginning.

No surprise that market lost a lot yesterday, everybody was positioned for passage of the bailout. Very tired of being talked down to by government that "they just don't understand." Free market can work this out. The bailout is an effort to fix the price of over-valued housing. Let the prices fall and people will buy them.

RE: "It rose more than 4% to 6.88%." Correction: It rose 4 percentage points to 6.88%, not "4%". (If yesterday's rate was 2.88 and it rose 4%, today's rate would be about 3%.). In this line of work it's an important distinction!

After yesterday I'm surprised it didn't go higher. Well, it looks like we've made back about a half a trillion dollars in the market today. Will Libor go down 2% now? Let the free market work it out. Everyone on Main Street is ready and bracing for impact! If people are going to try to sell this rescue plan by saying we lost over a "trillion dollars" yesterday, they must recognize that we can get it back as well. Once we send 700 billion to the government it's gone, possibly for years or forever. The 700 billion is just the first installment. Thank You, JDillon

Hey Brian,it also means that the banks will want MY money more.They'll give ME a higher interest rate for putting my hard earned cash into their bank(if the government doesn't give them my money for free instead).Imagine,people might just stop using credit cards and buying things they can't afford too.The glass is half full Brian.

Note One: The word "Is" should be capitalized in the title of your article. It may be a short word, but it is still a verb. English punctuation rules regarding title capitalization require verbs to be capitalized.