FHLB V LIBOR rates? PROS/CONS

3 Replies

I would like to know everyone's opinions on the scenario below.

You want to get a mortgage for 650k,  one bank quotes you with an interest rate of x basis points over the FHLB 5 year rate, and the other bank's rate is the same spread over a 5 year LIBOR swap. Which option is preferable for the borrower? What are the pros and cons of LIBOR and FHLB and which rate is more susceptible to future increases?

That's a pretty advanced question.  However, I will let you know that there is a lot of speculation that LIBOR will be going away and the most bank's will have the ability to pick a comparable index of their own choosing.

It sounds like either bank is planning on giving you a 5/1 or possibly balloon it in 5 years.  Are you planning on holding the asset for more than 5 years?  If not, then just pick the lower rate.  Also, if you are planning on refinancing within 5 years the potential adjustment doesn't matter much.

Most indications are that rates are going to continue to rise, so with either one you are looking at a potential rise in payments.  To combat this with either index you can ask the bank if they have adjustment caps.  My experience is for caps to be 2%.  However, if one of the banks has a lower cap than the other, this will help protect you from large adjustments.

Not sure if I ever really answered your question but here is a whole bunch more information for you to consider.

I would worry more about the deal and the terms of the loan. But if I had to choose I would choose FHLB. Since LIBOR is an international index I would choose FHLB rate since it would most likely match Americas Macroeconomic Policy/Condition.
Originally posted by @Yaya Y. :

I would like to know everyone's opinions on the scenario below.

You want to get a mortgage for 650k,  one bank quotes you with an interest rate of x basis points over the FHLB 5 year rate, and the other bank's rate is the same spread over a 5 year LIBOR swap. Which option is preferable for the borrower? What are the pros and cons of LIBOR and FHLB and which rate is more susceptible to future increases?

I'd worry about the deal. If the deal is good, then it is good, if not, move on to the next deal.

 It's unlikely that it matters all that much about the differences in FHLB 5 year or LIBOR. If rates increase (and they will) all rates will go up. The LIBOR is under strain since it has been abused by those in the know. Here is a recent article that demystifies some of the shenanigans going on in the market:

The Looming Mortgage Liquidity Crisis

https://www.zerohedge.com/news/2018-03-30/looming-...

"John and Joan Q. Public believe the 2018 mortgage business is like George Bailey’s Building & Loan in “It’s a Wonderful Life.” People deposit money, bankers lend it out, keeping the mortgage on their books. Easy Peasy.

As the folks from Brookings point out, it’s not that easy in these dark days of financial engineering. George Bailey’s handshake, promise and maybe a few words on a document to be signed by the borrower which meant simply, “I’ll pay you back,” has become a financial instrument, to be traded and hypothecated by faceless financial bureaucrats, each one taking a sliver of profit off the top.

Everyone remembers the crash of 2008 and plenty explanations have been posited. What the writers for Brookings explain is,

The literature has been largely silent on the liquidity vulnerabilities of the short-term loans that funded nonbank mortgage origination in the pre-crisis period, as well as the liquidity pressures that are typical in mortgage servicing when defaults are high. These vulnerabilities in the mortgage market were also not the focus of regulatory attention in the aftermath of the crisis."

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