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Guhan Venkatu |

Vice President and Senior Regional Officer

Guhan Venkatu

Guhan Venkatu is vice president and senior regional officer at the Pittsburgh Branch of the Federal Reserve Bank of Cleveland, where he manages relationships with key stakeholders in the area and is responsible for monitoring the region’s economic environment. For the past several years, his economic research has focused on inflation and inflation expectations, housing and household finance, and factors related to regional economic growth.

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07.10.12

Economic Trends

How Many U.S. Mortgages Are Linked to Libor?

Guhan Venkatu

The London interbank offered rate, or Libor, has served as a baseline for many bank-to-bank transactions in U.S. dollars since it was established in 1986. It has also increasingly become the basis for many financial transactions not occurring between banks. As such, recent revelations about Libor-fixing will affect these transactions, which include many U.S. mortgages.

Libor is an average of the interest rates on uncollateralized loans made between banks in London for some term, ranging from overnight to one year, for 10 different currencies. It is determined by the British Bankers’ Association, which each day polls its panel of banks on their respective borrowing costs. (More information on the specific way in which Libor is calculated can be found here: http://www.bbalibor.com/bbalibor-explained.)

The following table shows the fraction of U.S. mortgages that are linked to Libor and other indexes as of May 2012, according to data from Lender Processing Services, Inc. (LPS). LPS assembles these data primarily from the servicing portfolios of the largest residential mortgage servicers in the U.S. These data cover about two-thirds of residential installment-type mortgage loans. While about 3 percent of the LPS sample is identified as subprime, other sources, for example the Mortgage Bankers Association, estimate that the subprime fraction of all U.S. residential installment mortgages is closer to 10 percent.

Among the prime loans in this sample, almost 45 percent are indexed to Libor. For subprime loans, the proportion is substantially higher: close to 80 percent. Libor has historically been the dominant index for subprime loans. In 2000, for example, more than 80 percent of subprime adjustable rate mortgage (ARM) originations were linked to Libor, while in 2008, essentially all subprime ARM originations were linked to Libor. The popularity of Libor as an index for prime ARMs has grown more slowly, but by 2008, more than half of these originations were also linked to Libor.

 

First-Lien U.S. Mortgages by Type, May 2012

Prime
35,505,295
  Fixed
31,602,412
  ARM
3,772,655
    Libor-indexed
1,629,599
    Treasury-indexed
1,222,130
    Other index
920,926
  Other
130,228
Subprime
1,172,296
  Fixed
700,263
  ARM
470,746
    Libor-indexed
368,991
    Treasury-indexed
66,642
    Other index
35,113
  Other
1,287
Total
36,677,591

Note: “Libor-indexed” in the table refers to loans indexed to the 6-month US dollar Libor, while “Treasury-indexed” refers to loans indexed to the 1-year U.S. Treasury bill.
Source: Lender Processing Services, Inc.