ON THIS DATE IN 2022: You will be getting ready for a new year with your new Mortgage Index
I have written many times about adjustable rate mortgages and how the interest rate (and thereby the monthly payment) on those mortgages by definition can change, and how important it is to understand how and why they change, so you can better match your needs and be cognizant of potential increases in your monthly payment. The index (or ogen in Hebrew) used by the bank for that portion of your mortgage is the key factor to understand how and when your interest rate and thereby your monthly payment will change. The London Interbank Offered Rate, more commonly known by the acronym LIBOR, has been a commonly used index for residential mortgages in Israel, especially for mortgages in shekels linked to the US$. The LIBOR index as we know it today will cease to exist in 2021.
Before 2010, many borrowers—both Israeli and foreign—borrowed the entire sum of their mortgage linked to the US$ or other foreign currency (later regulation by Bank of Israel limit it to only a partial sum of the mortgage). For those readers who have a mortgage in which part or all of it is LIBOR-based, it is still uncertain how in the year 2022 your mortgage bank will set the interest rate you need to pay.
While the LIBOR rate was initially set up as a common denominator enabling cross-border loans, cross border meaning lender and borrower are each in a different country. LIBOR ended up to be much more, opening up vast markets far beyond anyone’s imagination. In a sense, the way it is used in residential mortgages in Israel has similar attributes to a cross-border loan: The borrower who may live in the US or in Israel but has significant US income, is able to borrow in shekels linked to the US$ at a LIBOR rate, thereby eliminating the currency risk that has affected many families living in Israel dependent on foreign income over the last number years as the New Israeli Shekel (NIS) has grown stronger.
LIBOR was created in 1969 in London for what would turn out to be a historic cross-border transaction. After that, it grew in use globally, while the rate continued to be set in London by the British Bankers Association through what was meant to be an impartial method. The problem arose after an investigation by authorities in the UK and US; it turns out that the index being set at that time was anything but impartial. Explaining what happened is beyond the scope of this article. What is pertinent is that LIBOR, will cease to exist internationally as well as in Israel.
I noticed in the 1990s that US mortgage documents included wording that if the LIBOR index was no longer available, something similar would be used by the lender. Eventually similar language was used in Israel.
So how will the interest rate be set for the dollar linked portion of your mortgage in 2022? Consider how widely LIBOR is used today. Globally, the amount of money that has been borrowed, invested, hedged, structured, etc. that reference LIBOR is staggering in scale. In US$, it is in the hundreds of trillions (according to one source, US$ 350 trillion for a single type of instrument). My point is finding an equitable, fair replacement is important to many financial parties, from major corporations to governments around the globe.
So if you have all or part of your mortgage based on LIBOR, even though the LIBOR index as we know it will cease to exist by 2022, and you don’t know yet how your bank will set the interest rate, there is no need to panic. There are literally trillions of dollars riding on it so many eyes are watching and have been thinking of this. Due to the amount of US mortgages tied to the 3 Month US$ LIBOR, the Intercontinental Exchange (ICE) is talking about extending the 3-month US$ LIBOR (and certain others) beyond 2022. Here in Israel I am sure the Bank of Israel will be involved in finding a solution and preserving Israeli mortgage borrowers’ rights.
If you have any questions about the above feel free to email me at email@example.com I hope I have enlightened you a bit and alleviated any fear of 2022 in regards to your LIBOR-based mortgage. From the Moville Mortgage and Finance LTD family to yours, wishing you a healthy and happy New Year!
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance Ltd.
Moville Mortgages can found on the web at www.movillefinance.com. They can be reached at 073-796-2226 ext. 711. In the US, dial 201-377-3418; in the UK, dial 208-596-4501.