July 28, 2017 – Future changes in LIBOR (London Interbank Offered Rate) may cause disruptions in the adjustable rate mortgage market in the United States, according to Anthony Powell, Vice President of Operations, AAFMAA Mortgage Services. According to Chad Bray, New York Times, page b-3 business section, Regulators are replacing LIBOR with “a system of rates that are more closely tied to interest rates on actual loans”. If the military family currently has (or is considering) an adjustable rate mortgage, it is important to understand the benchmark used to adjust the military family’s mortgage rate.
Basically, the errors of past financial participants have caused LIBOR to remain unreliable to the point that regulators are searching for potential replacements. What this means for military families and other mortgage consumers, is that the majority of lending in the United States will shift from a roughly 30 year old benchmark (click here to read the history of LIBOR) to something potentially more regulated and accurate.
What this will likely mean if regulators don’t get it right, the $300 trillion LIBOR market (financial products, derivatives, mortgages, student loans, auto debt) will likely evolve into a higher cost market initially. With uncertainty comes higher costs, as predictability suffers. Higher interest rates on all financial products may enter the market. Over time as investors become comfortable with the new-LIBOR, rates should come back down.
This change is planned for 2021. Some things for consumers to think about include, what does this mean for ARMs that adjust in the post-LIBOR era (and other financial products)? How will documentation that is in place today change? Many of today’s mortgage participants haven’t thought through this new change, which will likely cause mortgage adjustments to increase variability. According to the NY Times articles, Andrew Bailey, the Chief Executive of the Financial Conduct Authority in Britain, believes this time-frame affords markets to adjust.
What should a military family looking for a mortgage do? Ask to see the mortgage documentation on ARM (adjustable rate mortgage) product and determine if it is tied to LIBOR. The complexities of adjustable rate mortgages are many for a first time home buyer. Education is an important first step to getting the best mortgage rate. Hopefully this article will cause some to ask for benchmark documentation on ARMs that underly the military family’s financial foundation. Additional information may be provided by emailing amay(at)aafmaa.com or calling Anthony Powell at 919 771 3379.
Competitive, accurate, honest, transparent, and member-owned. Experience the difference at AAFMAA Mortgage Services. AAFMAA Mortgage Services LLC is licensed in the States of Alabama, Delaware, North Carolina, Florida, Virginia, Maryland, Connecticut, Tennessee, Kansas, Rhode Island, Oklahoma, and Pennsylvania (NMLS: 1423968). The team operates from 639 Executive Place, Suite 203, Fayetteville, North Carolina 28305. Call 844-422-3622 (844-4-AAFMAA), email mortgage(at)aafmaa.com or visit the website at http://www.aafmaa.com/mortgage to reach AAFMAA Mortgage Services. Equal Housing Opportunity. NMLS: 1423968. Anthony Powell, NMLS ID 78385.
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