One Day Something Will Work




I’ll preface this note by saying it's mostly about Libor. Even so, you 
might find it interesting.



We’ll skip past most of the boring details; by now, many of you reading 
this already know the deal with Libor, i.e. it’s been acting crazy. That 
may or may not be the b-school term, but it’s certainly the reality.



Historically, Libor and US Treasurys have essentially mimicked each 
other. But as banks around the globe have for all intents and purposes 
become scared to lend with each other (knowing that the same garbage
 that’s on their own books is likely to be on their peers’), the gap 
between Treasurys and Libor has ballooned. Libor rates have soared,
 Treasury rates have cratered. Of course, the only reason most people 
care about this is because it impacts what rate consumers pay on their
 debts, chief among them their mortgages.




Now that we’re all caught up, things get interesting. The Federal 
Reserve Bank of Cleveland just authored some commentary that offers yet 
more cheerful news about just how difficult it’s going to be for us to 
get out of this hole. In a nutshell, one of the government’s key efforts 
to prop up the economy is to get the housing market out of the gutter 
through lower mortgage rates, and there's a decent chance it ain’t gonna
 happen.



The bank’s survey of Ohio showed that nearly every subprime adjustable
r ate mortgage since 2007 has been linked to Libor, and about 50% of
 prime ARMs are tied to the rate, up from less than 20% back in 2000. So, 
in Ohio alone, subprime borrowers are paying about a hundred bucks more
a month if their ARMs are tied to Libor instead of US Treasurys. It’s
 not chump change when a) you probably couldn't afford the house you’re
in to begin with, and b) by definition, you’re not particularly good 
with credit.


While your impulse might be to think, “Well, that stinks for them,” keep 
in mind that it actually stinks for everyone. Remember, one key aspect
of the latest effort to help us out is the Fed's program to buy mortgage 
paper, which in turn is supposed to lower housing finance costs. (Anyone 
remember the seemingly short-lived idea of a 4.5% rate for all new home
 buyers?)

This may be a further case of throwing good money after bad. It also 
might be time to go back to the drawing board. Again.



Thomas Granahan
Thomas.granahan@sourcemedia.com