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Who Sets Your Mortgage Rate? LIBOR?
Your Bank Has Little To Do With Your Mortgage Rate
January 30, 2012

Stop blaming your banker for the mortgage rate you are paying. And on the flip side, do not
give him all the credit for the low rates we are currently getting. In London, England there
are 19 bankers that call the shots. These bankers determine the rates throughout the world.
The rates for mortgages, bonds and mortgage backed securities are affected by the
decision these bankers make.

Around ten o'clock each working day the 19 giants of banking meet at a table and discuss
what the LIBOR, the London Interbank Offered Rate, should be for the day. LIBOR is based
on what each bank would pay to borrow money from another member bank. The rate is
sanctioned by the British Bankers Association. The rate selected affects about $360 trillion
in financial instruments throughout the world.

These 19 decision-makers are not elected, and the organization is very lightly regulated. In
any other industry this system would be hailed as one of collusion and this practiced would
never be tolerated. So, why can the banks get together and set rates?

Investors are not comfortable with this arrangement among the major  banks. Many
investors are suing the banks because there is a lack of transparency. In August 2011,
Charles Schwab, a brokerage firm and investment manager, sued 11 banks, including
Bank of America and Citigroup. The lawsuit claimed that the banks manipulated LIBOR
which led investors to lose money. The lawsuit further claimed that the banks understated
their borrowing costs, thereby lowering their interest expenses on financial products tied to
the LIBOR.

Investigations continue to hound LIBOR and its proponents. The SEC, the British Financial
Services Authority, the Justice Department, the Federal Trade Commission and the U.S.
Commodity Futures Trading Commission are all looking into the operations of LIBOR.

In addition, regulators and prosecutors in Japan, Britain and the EU have requested
documents from major banks, including Royal Bank of Scotland, Credit Suisse Group and
Barclays.

The recent debt crisis in Europe drew attention to the LIBOR. The possibility of Greece and
Italy defaulting on loans was a grave concern. The gap between the high rate and low rate
submitted by the LIBOR panelist for 3 month dollar loans was the widest in almost three
years. On November 8th, 2011, the spread reached 30 basis points.

A small bank like Credit Agricole was willing to pay 0.575 percent to borrow money. While
a giant bank like HSBC was willing to pay a mere 0.275 percent.

Many financial experts agree that a rate based on transactions would be a better
benchmark than the LIBOR. The search is on for a LIBOR alternative. The new system
should be one that is free from the influences of participating banks.