Defends LIBOR Index

The response to a question about adjustable-rate home loans indexed to the London Interbank Offered Rate (“LIBOR Mortgages Good For Lenders,” Feb. 4) states that such loans are “definitely not pro-consumer.”

We at Western Federal Savings, to date the major provider of LIBOR-indexed conventional home loans in California, believe that this statement is seriously misleading.

Over the past eight years, the one-month LIBOR index has often been lower than either the Cost of Funds or Treasury indexes. In addition, the margin or spread required by LIBOR-indexed loans is often lower than those required by loans based on other indexes. This is so because the market for LIBOR-indexed investments worldwide is far greater than the market for investments based on other indexes.

Since the interest rate of an ARM is the sum of the index plus the margin, LIBOR loans will often have lower interest rates than ARMs tied to other indexes--both initially and during the life of the loan.

More importantly, the consumer protection features of the LIBOR-based loans are generally greater than those of ARMs based on other indexes. Western Federal’s Liboration Loan for example, contains not only an annual payment cap and a lifetime interest-rate cap, but also an initial, two-year interest-rate cap.

LIBOR-based will often make sense for those borrowers who are looking for lower overall credit costs and for stronger consumer protection features than standard ARMs.

WILLIAM S. SMITH

Marina del Rey

Smith is vice president , loan administration at Western Federal Savings.