LIBOR Buster - Fed Creates Temporary Auction Facility

LIBOR REVIEW

Let's start by a quick review of what the LIBOR is. LIBOR is an acronym for the London Interbank Offer Rate. In simple terms it's the rate that banks in the London wholesale market charge each other for loans. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses. The LIBOR is among the most common of benchmark interest rate indexes used to make adjustments to adjustable rate mortgages. As of late the LIBOR has been surging, a situation that is worsened by the resetting of Adjustable Rate Mortgages that use the LIBOR Index. Essentially, what this does is reduce the liquidity and increase the costs involved with bank to bank loans. It becomes difficult for them to raise funds.

Fed's Temporary Auction Facility

The Fed announced a deal with the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank to create a temporary auction facility to keep banks funded. In plain English, this should help with the credit markets, increase necessary liquidity, and bring the LIBOR back down to earth - or at least closer the the normal 10-12 basis point higher than the Fed funds rate.

Wrap-up

Getting the LIBOR back in-line should increase the liquidity needed by the markets. Furthermore, it may ease some of the mortgage pressures related to ARM's that use the LIBOR index for their corresponding interest rates. A nice addition to the latest 0.25 point cut in the Fed Funding rate.

Shannon Luscher VP Elite Mortgage Solutions, Inc. Visit the Elite Mortgage Daily Blog for Mortgage News & Insights at http://elitemortgagesolutionsdailyblog.com/ Wisconsin borrowers can find more information about rates and products by visiting my comprehensive website - http://www.elitemortgagesolutions.com/