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Adjustable-rate mortgages and the Libor surprise

Author

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  • Mark E. Schweitzer
  • Guhan Venkatu

Abstract

Adjustable-rate mortgages have typically been tied to either of two indexes, one based on U.S. treasuries, the other on the London interbank offered rate, or Libor. The index is used to determine a mortgage?s new interest rate when it is reset, and up until recently, the choice would have made little difference. But since 2007, the rates on which the indexes are based have diverged sharply, and borrowers with Libor-based adjustable-rate mortgages are likely to pay more than they would have had their mortgages been tied to treasuries. Moreover, the proportion of Libor-based ARMs has increased significantly, especially for subprime loans.

Suggested Citation

  • Mark E. Schweitzer & Guhan Venkatu, 2009. "Adjustable-rate mortgages and the Libor surprise," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jan.
    • Handle: RePEc:fip:fedcec:y:2009:i:jan
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    File URL: https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/2009-economic-commentaries/ec-20090109-adjustable-rate-mortgages-and-the-libor-surprise.aspx
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    Cited by:

    1. Lawrence Kreicher & Robert N McCauley & Philip Wooldridge, 2014. "Benchmark tipping in the global bond market," BIS Working Papers 466, Bank for International Settlements.
    2. Phillip Swagel, 2009. "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 1-78.

    More about this item

    Keywords

    Interest rates; adjustable-rate mortgages;

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