LIBOR, Schmibor – who cares?

Laurie MacNaughton © 2020

In September Ginnie Mae announced home mortgages, including reverse mortgages, would switch over to the Constant Maturity Treasury, or CMT, from the current LIBOR index. The move came fully one year earlier than anticipated.

So first, who cares?

Turns out, lots of people care. Indeed, global markets have been preparing for the transition for a number of years.

But also turns out…not a lot of consensus exists on exactly what the migration will mean for the average household.

Why the move?

The intent to move away from the LIBOR was announced after the index was found susceptible to manipulation. In fact, depending upon who you talk to, a small group of insiders almost brought about an end to civilization as we know it. Hyperbole notwithstanding, it’s widely acknowledged that manipulation of the LIBOR contributed significantly, almost catastrophically, to the 2008 worldwide credit crisis and global recession.

A few alternative indices were in the running as LIBOR replacements. Most explanations regarding the choice of the CMT are excruciatingly technical – I unsuccessfully tried to find a truly good Cliff’s Notes version – but here’s the Federal Reserve Board’s stab at it:

“Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.”

The general idea is that the CMT accurately reflects the “actual” cost of money; furthermore, the CMT can respond quickly to economic conditions.

What does this mean for you, and for your clients?

If your clients have a loan in process – depending upon the closing date – they may be asked to sign another loan application. We all may well see credit card companies and mortgage servicers contacting us with new disclosures. According to some analysts, there could be short-term market turbulence.

I readily acknowledge I am not an economist. I am not investment advisor. Nor am I an expert on global markets, an investment banker, a possessor of a crystal ball; I am a loan officer. But I am also an avid consumer of financial bulletins, articles, and newsletters, and I believe this much is certain: the markets ultimately will determine whether the CMT index is the best index for the years to come.

But as clients’ increasingly frequent questions have forced me to seriously research the topic, I have grown ever more confident of this: you, and I, and all our clients will weather this transition just fine.

And…I will close with this: if you have questions regarding how a reverse mortgage might improve your client’s financial outlook in these unsettled times, give me a call. I always love hearing from you.