Rate in banking scandal ripples through mortgages

Associated Press Modified: July 13, 2012 at 12:00 pm •  Published: July 13, 2012

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.

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