Homeowners Charge Banks with Manipulating Libor to Lift Price of Home Loans

A group of mortgage borrowers has charged a dozen banks with manipulating a key lending rate that raised the cost of their loans.

Annie Belle Adams, a homeowner in Mobile, Ala. and four other homeowners in the state have filed a lawsuit against Bank of America (BAC), Citigroup (TK), JPMorgan Chase (JPM), Barclays (BCS), Credit Suisse (CS), Deutsche Bank (DB), HSBC Holdings (HBC), Lloyds (LYG), Royal Bank of Canada (RY), Royal Bank of Scotland (RBS), UBS (UBS) and Rabobank that charges the companies with conspiring to manipulate the price of the London Interbank Offered Rate in violation of antitrust laws. None of the banks have commented on the case.

The homeowners, who have asked the court to designate their lawsuit a class action on behalf of borrowers nationwide, obtained home loans over a roughly nine-year period beginning in January 2000.  The loans carried rates of interest that changed at pre-determined dates, with adjustments tied to the Libor.

The companies that originated the mortgages later transferred the loans to the defendants, which bundled the loans into securities sold to investors. 

“This matter arises from a global conspiracy to fix or set LIBOR – the reference point for setting interest rates on adjustable rate mortgages and other loans – by a cabal of prominent financial institutions,” Adams and her fellow plaintiffs wrote in a complaint filed recently in U.S. District Court in Manhattan. 

Under the terms of their mortgages, the borrowers paid an agreed-upon interest rate for a period of roughly two years, after which the rate changed. The new rate, which reset roughly every six months thereafter for the duration of the loan, was tied to the Libor. The homeowners charge the banks with rigging LIBOR rates via submissions on roughly the first day of each month, when they knew that rates on most adjustable-rate mortgages that tied to the LIBOR took effect.  

According to the homeowners, the banks finessed the interest rate on the loans to benefit their derivatives trading businesses.  Manipulating LIBOR “so as to increase it (or keep it from decreasing as much as it should have) allowed defendants to raise the interest rates paid by the plaintiffs on their adjustable rate notes and thereby increasing the spread between the amount they paid investors and the amount they collected from debtors like the plaintiffs,” the homeowners added.

Though the complaint does not specify the amount of damages the homeowners are seeking, they overpaid as much as $300 a year for their mortgages as a result of the allegedly unlawful activity, John Sharbrough, an attorney for the homeowners, told American Banker.

The lawsuit was first reported in the Financial Times.  From 2005 to 2009, U.S. lenders originated roughly 900,000 mortgages tied to Libor in the U.S., according to the Office of the Comptroller of the Currency. The loans have an outstanding value of roughly $276 billion.

The case introduces a twist into Libor-related revelations, which to date have focused on banks’ allegedly lowering the influential rate.  In June, regulators in the U.S. and U.K. fined Barclays $470 million in June after the bank admitted lowering its Libor submissions to make the bank appear healthier and lower its cost of credit. 

Both the House Financial Services Committee and the Senate Banking Committee opened probes last summer into Libor-setting after The Federal Reserve Bank of New York disclosed that U.S. officials were told in April 2008 that banks may have been manipulating the rate.

The homeowners have asked the court to order the banks to repay any amounts allegedly obtained unlawfully.