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SIGTARP ADVISES AGAINST USING LIBOR The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) is advising Treasury to discontinue use of the London Interbank Offered Rate (LIBOR) as a benchmark for interest rates on TARP programs. "Continued use of LIBOR for TARP while it is broken, unreliable, and remains potentially subject to manipulation undermines public confidence in financial markets and TARP and could put taxpayers at risk," SIGTARP stated in its quarterly report to Congress. LIBOR's soundness was brought into question in recent months when it was alleged Barclays executives conspired to manipulate the rate, actions which could date back as early as 2007. Three executives left their posts at the bank, and Barclays settled the charges for almost $500 million. However, LIBOR is not in the clear. SIGTARP cites several officials who doubt LIBOR's credibility. For example, the Office of Financial Research at the Treasury stated the manipulation "poses significant risks to market integrity and investor trust." Additionally, Martin Wheatley of the United Kingdom's Financial Services Authority, said LIBOR is "built on flawed incentives, incompetence, and the pursuit of narrow interests that are to the detriment of markets, investors, and ordinary people." In addition, Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, suggests LIBOR's integrity may not yet be restored, according to SIGTARP's report. 46 "Given the LIBOR manipulation and its current lack of reliability, the Federal Reserve has a solid basis to reach out to TALF borrowers and Treasury to the six PPIP managers, to express the need to amend the TALF/PPIP contracts," SIGTARP stated in its report. The Public Private Investment Program (PPIP), which provides support to the mortgagebacked securities market, holds $5.685 billion in outstanding debt to Treasury. The Term Asset-Backed Securities Loan Facility (TALF), which supports asset-backed securities such as student, auto, and credit card loans, holds $598.6 million in outstanding debt to the Fed. SIGTARP also addressed the future regulation of American International Group (AIG) in its report. After going years with no oversight, AIG was under Treasury's influence, from the time the financial crisis set in, up until last month when Treasury's stock holdings fell below 50 percent. Currently, AIG falls under the regulatory reach of the Federal Reserve because the corporation currently owns a small bank. However, AIG has plans to sell the bank, SIGTARP said. Such a move would leave AIG, "one of the largest insurance companies in the world," without a regulator, according to SIGTARP. SIGTARP recommends designating AIG "systematically important under Dodd-Frank" which would make the company subject to the strongest regulation available." BORROWERS REDUCE OWN PRINCIPAL AT REFINANCING CLOSING TABLE The vast majority of homeowners who refinanced in Q 3 2012 either maintained or slashed their loan debt, according to a release from Freddie Mac. In the year's third quarter, 83 percent of homeowners who refinanced their first-lien home mortgage either kept the same loan amount or lowered their principal balance by paying additional money at the closing table, the GSE revealed. That percentage fell just short of the record 85 percent recorded during Q 4 2011. Of those borrowers refinancing, 54 percent maintained about the same loan amounts while 29 percent reduced their principal balances. "On average, borrowers who refinanced reduced their interest rate by about 1.7 percentage points," said Frank Nothaft, VP and chief economist at Freddie Mac. "On a $200,000 loan, that translates into saving about $3,500 in interest during the next 12 months." Refinances done under the Home Affordable Refinance Program (HARP) had an average interest rate deduction of 2 percentage points. Interest rates on fixed-rate mortgages hit new lows during September, Nothaft noted, with 30-year loan products averaging 3.5 percent and 15-year averaging 2.8 percent during the month. According to Freddie Mac's separate Primary Mortgage Market Survey, 82 percent of loan applications during the third quarter were for refinance, matching the record share from the fourth quarter of 2010. In response, Nothaft said Freddie Mac boosted its origination projection for the second half of the year to account for additional refinance activity. Among the refinanced loans analyzed by the GSE, the median depreciation of the collateral property was 10 percent over the median priorloan life of 4.8 years. For loans refinanced under HARP the median depreciation in property value was about 31 percent, and the prior loan had a median life of about 5.6 years. Approximately $7.7 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, up from $5.9 billion in the second quarter. However, cash-out volume remained low compared to the $84 billion peak in the second quarter of 2006. KNOW THIS The mid-November Reuters/ University of Michigan Consumer Sentiment Index climbed to 84.9, its highest reading since July 2007.

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