Archive for July, 2012

LIBOR Rate-fixing Scandal and Reverse Mortgages

Sunday, July 15th, 2012



The ongoing LIBOR (or London interbank offered rate) rate-fixing scandal involving Barclays and other big global banks raises reverse-mortgage rates concerns because since 2007 when FHA approved LIBOR for HECM reverse mortgages (Mortgagee Letter 2007-13), the LIBOR index has practically cannibalized the CMT (Constant Maturity Treasury) index, the original HECM index.

The cannibalization of the CMT index was  market-driven: investors borrow mostly via LIBOR, so it makes business sense for them to invest in (or to buy) LIBOR-denominated assets. If the LIBOR index is vulnerable to big-banks manipulation as has been alleged, it is possible that the index on which billions of reverse mortgage loans and securities have been anchored since 2007 is tainted.

What is the extent of financial harm to older Americans who have taken LIBOR-indexed reverse mortgages since 2007? The CFPB’s Office of Older Americans, HUD, AARP, and consumer advocates should put their researchers to work.

And here are some other questions: Beyond the enforcement and restitution processes, how can the LIBOR index regain consumer and investor trust? What are some possible ways to prevent future rate-fixings of the kind alleged in the LIBOR scandal?  Besides hefty fines, what other penalties should the perpetrators face?

This could well be the grandmother of financial scandals.


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