Rate in banking scandal ripples through mortgages

The interest rate at the center of a banking scandal is little-known outside the financial industry but provides the architecture for trillions of dollars in contracts around the world, including mortgages.

The rate is called LIBOR, short for London interbank overnight rate. A British banking trade group sets it every morning after international banks submit estimates of what it costs them to borrow money.

American and British regulators fined one of those banks, Barclays, $453 million in June for manipulating LIBOR between 2005 and 2009 by submitting false reports of borrowing rates. Other banks, including Citigroup and JPMorgan Chase, are being investigated.

The Federal Reserve Bank of New York released documents Friday that show it learned five years ago of big banks understating their borrowing costs to manipulate the key interest rate.

The scandal has raised more questions about banks' credibility after the 2008 financial crisis.

LIBOR is the benchmark most often used to set the interest rate for adjustable-rate mortgages, according to Zillow, a real estate information service.

Take what is commonly known as a 5/1 ARM: That means the mortgage rate is fixed for five years, then adjusts once a year after that.

A bank could specify that the rate adjusts each year to LIBOR plus 2.5 percentage points. On Friday, the one-year LIBOR rate was 1.07 percent. So a mortgage adjusting today would have an interest rate of 3.57 percent for the next year.

Rates for fixed-rate mortgages of 15 or 30 years are usually based on the 10-year U.S. Treasury note.

LIBOR is used in a similar way to determine interest rates for some credit cards and student loans and for what it costs corporations to borrow money. LIBOR and a related European rate influence more than $500 trillion in global contracts.

Barclays has admitted that it submitted figures that were lower than accurate for its interbank borrowing during the financial crisis.

The false reports made it appear that Barclays was healthier than it was. Paradoxically, they also could have made borrowing cheaper for people whose mortgages are indexed to LIBOR and were due to adjust.