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SUNDAY, NOVEMBER 8, 2009
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PREMIUM NEWS ARCHIVE

Adjustable-rate mortgages and the Libor surprise.

Article from: Economic Commentary (Cleveland) Article date: January 1, 2009 Author: Schweitzer, Mark; Venkatu, Guhan

Changes in an adjustable-rate mortgage's (ARM) interest rate result primarily from changes in the index rate on which it is based. The choice of index rate can vary from lender to lender, but prior to the recent turbulence in financial markets, the particular index used mattered little. That's because the indexes, themselves interest rates of similar maturities and risk-profiles, tended to move together.

But as the financial crisis has continued, this relationship has weakened. As a result, the index on which an ARM is based, ...

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