Perhaps you’ve just noticed the headlines emerging around Libor, or maybe you haven’t even seen them yet. Either way, this story, which has been in the European press for a few weeks now and is just now starting to get picked up on our side of the Atlantic, has big implications for real estate and mortgage finance. Here’s a quick rundown of what it is and how it could affect you.

Q: OK, let’s start with the basics. What’s Libor?

A: Libor is an acronym that stands for the London interbank offered rate (not the Long Island Board of REALTORS®, at least not in this case). That’s the average interest rate banks around the world use to lend money to each other. The rate is set (as the name indicates) in London by financial data services firm Thomson Reuters and overseen by the British Bankers Association (BBA). It’s theoretically calculated by major member banks independently submitting to the BBA their best estimates of the interest rates other banks would charge them to borrow money. When you remove the top four and bottom four estimates, then average out the remaining ones, you get Libor.

Q: Why is Libor a big deal? I hadn’t even heard of it until recently.

A: Libor impacts the rates used for credit card, mortgage, and student loan debt. There’s no precise figure, but at least $300 trillion — and quite possibly more than double that amount — worth of financial products are affected by it. To put it another way, that’s more than four times the economic output of the entire world over a four-year period. So, even a tiny rate change can mean millions or even billions of dollars gained or lost. This infographic provides a good breakdown how Libor impacts the financial ecosystem. Continue reading »