Rabobank admitted to criminal wrongdoing this week for their part in the Libor scandal, according to the New York Times. They agreed to pay more than $1 billion in penalties, entered a deferred prosecution agreement with investigators and their CEO has resigned.
The Dutch lender allowed employees with trades connected to the Libor to participate in setting the benchmark interest rate, according to the commodity futures trading commission (CFTC). The bank was essentially betting on the rise or fall in interest rates, then rigging the Libor so it moved in the direction of their choice.
Unlike recent U.S. bank settlements, this deferred prosecution agreement has a bite: regulators reserve the right to criminally prosecute Rabobank if it doesn’t cooperate with investigators or otherwise fails to keep its nose clean with the CFTC.
first tuesday has followed the Libor developments closely since the Libor is used to set interest rates on adjustable rate mortgages (ARMs). The method for setting the Libor has changed since news of the scandal broke. Ostensibly, the Libor is more reliable today. However, investigations into the rate manipulation and its subsequent management are ongoing.
The fact remains that using ARMs to finance a real estate purchase is really only appropriate for seasoned professionals with a healthy risk tolerance. When the ARM-to-loan ratio increases, it’s clear that average borrowers are taking unnecessary risks to realize their dream of homeownership.
Currently the ARM-to-loan ratio has yet to take off, but interest rates are on the rise. Without the remedy of loan assumptions for buyers in need of a lower interest rate, ARMs use is likely to skyrocket in the near future.
This does not bode well for a real estate market desperately in need of some sustainable predictability — especially when the ARM interest rates are set by a bunch of crooks.