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Why the LIBOR Rate is Important to the U.S. Economy

August 13, 2007

By MoneyRates Team | Money Rates Columnist

LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market. A Eurodollar is a dollar deposited in a bank in a country where the currency is not the dollar. The Eurodollar market has been around for over 40 years and is a major component of the International financial market. London is the center of the Euromarket in terms of volume. The index is quoted for one month, three months, six months as well as one-year periods.LIBOR rates quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank. The most common quote for mortgages is the 6-month quote. LIBOR's cost of money is a widely monitored international interest rate indicator. LIBOR is currently being used by both Fannie Mae and Freddie Mac as an index on the loans they purchase.

The above graph from mortgage-x.com shows that LIBOR has historically been higher than some other interest rate benchmarks. What has many mortgage lenders frightened is the recent jump in LIBOR and the ramification to the American consumers who will have to pay more on their mortgages and loans tied to LIBOR.


1-month: 5.33% to 5.62%
3-month: 5.36% to 5.58%
6-month: 5.26% to 5.40%
1-year: 5.11% to 5.23%

Despite the potential of the Federal Reserve lowering interest rates in the United States, the London market for Eurodollars and increases in the LIBOR rate, can have a direct effect on mortgage delinquencies. While many American homeowners with variable-rate mortgages can rest easy as their Treasury-indexed loan rates are moving down, it appears that the homeowners with LIBOR-rate loans might need to start watching the European markets before planning household budgets.

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