How will the Libor scandal impact Main Street?

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How will the Libor scandal impact Main Street?
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COMMENTARY | The residential real estate market is beginning to show real signs of life.

Home values have posted their first annual increase in nearly five years, acccording to the latest Zillow index, which is a well-respected year-over-year analysis of the sale of similar homes in the same area.

So we may be getting closer to a healthier housing market for the first time since the bubble burst in 2008.

But then the Libor scandal came along and threw a gigantic wrench in the works.

On the surface, Libor might appear to solely be a Wall Street problem.

There is no easy target for the populace to vilify, as there is with the HSBC money laundering investigation. And the damage done by the banks' apparent attempts to subjugate Libor to their own benefit, at first glance, might appear to be limited to the banks themselves.

Perhaps that is why outrage over Libor hasn't yet reached critical mass. But make no mistake; the impact of the scandal could be larger than any of the banking scandals that have come before it.

This is very much a Main Street issue. As the investigation continues, we may learn how homeowners were burdened with distorted mortgage rates.

What is Libor?

Libor stands for London Interbank Offered Rate. Simply put, Libor is the rate banks use to charge each other money.

The banks help set it, and it's basically the starting point for lending rates, including a large percentage of mortgage interest rates here in the United States.

And as we are learning now, traders set the Libor rate not based on what was fair and equitable, but rather to make their banks look healthier than they actually were. (And apparently, for a few cheap favors as well.)

Questions homeowners should be asking

The next logical question if you are a homeowner: What impact will this latest crisis have on the housing market, and will it be significant? Will mortgage rates go up? Will interest rates go up for new buyers, putting a new drag on a still-fledgling market?

The answer, I'm afraid, is not yet clear, but what I can do is bring you to the root of the issue.

The view of Libor from Main Street

First, the rates were manipulated both up and down depending on the time period. Evidence is pointing to some NY Fed involvement with trying to keep the rates artificially low during the 2008 economic meltdown.

That would have helped stem the tide of interest rates increasing if you had a home loan tied to Libor. In fact, trillions of dollars of home loans were tied to Libor in 2008. That, my friends, is not chump change.

This means that even a tiny bit of "rate rigging" could have actually softened the blow. And that is how certain high-level Wall Street bankers and Fed executives will likely explain their involvement in a conspiracy so large that the world is still in a catatonic denial.

On the other hand, if you were betting on rates to rise you may have been unlucky.

Who makes those bets you ask? You won't believe the answer, but lots of towns, counties, and school boards do when issuing municipal bonds.

You see, they purchase interest rates as a hedge and actually make money when Libor rises. But if the rate is artificially low, then Main Street loses -- and you do, too.

Why? Because there is less money for police, firefighters, hospitals, and everything else that your city, county, school board, and state pay for.

What's next?

But let's get back to the task at hand of anticipating the impact of the Libor crisis on residential real estate.

I believe the following will occur:

1. Obviously, new borrowers will likely -- at least for a while -- shy away from a Libor loan.

2. Wall Street will continue to bury itself with one scandal after another to the point that listing them is a waste of thought. And you will again hear the sucking noise of billions of dollars being taken out of the hands of Wall Street accounts by folks on Main Street. This could actually be a good thing for real estate.

Smart homeowners would rather pay off their current home, buy a larger house, or buy an investment property if given the opportunity than have anything to do with Wall Street. The same goes for folks who have given up on their retirement plans and would rather just invest in tangible things, which obviously includes real property.

So you might actually see Libor encourage even more real estate growth.

3. If I am right about No. 2, then it is likely that the next crisis will be the final nail in Wall Street's coffin and will prevent the big banks from being able to compete for those Main Street dollars.

Real estate attorney Roy Oppenheim is the co-founder of Oppenheim Law in Fort Lauderdale, Florida, and Weston Title. He is also creator of the South Florida Law Blog, where he frequently provides "In the Trenches" commentaries.

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