[Updated] FHA Formally Drops LIBOR for Adjustable Rate Reverse Mortgages and Adopts SOFR
The Federal Housing Administration (FHA) officially announced Thursday that the Home Equity Conversion Mortgage (HECM) program is dropping the London Interbank Offered Rate (LIBOR) index for variable rate HECMs, and will instead adopt the Secured Overnight Financing Rate ( SOFR). This was made official with the publication of the Mortgage Lender’s Letter (ML) 2021-08 released on Thursday morning.
In the long-awaited federal government guidance, the new ML “removes the approval of the use of the LIBOR index for adjustable interest rate HECMs”, approving the industry preferred index of SOFR while providing a timeline for how and when changes will be implemented.
SOFR as a new approved index
“[This ML] approves the overnight guaranteed finance rate (SOFR) index and allows mortgagees to mix index types for new HECMs with annual adjustable interest rates when setting the mortgage interest rate average expected using the constant maturity US Treasury (CMT) and initial mortgage interest rate (note rate) and periodic note rate adjustments using the SOFR index ”, we read in an FHA INFO notice on the new guidelines.
The ML also announces a new note template language, included in the revised template loan documents for the first and second HECM Adjustable Interest Rate Notes and incorporates the changes described in the new ML. The revised loan model documents are now available as a resource on the FHA’s dedicated single-family mortgage model documents webpage.
In the ML itself, the guidelines specify that the regulations are revised and, in the event of conflict, are replaced by the new guidelines.
“Mortgages can no longer create adjustable interest rate HECMs using the LIBOR index, but can use the CMT or SOFR indexes,” the ML reads. “For all HECMs with adjustable interest rates, the mortgagee should use the 10-year CMT to establish the expected average mortgage interest rate. For HECMs with annual adjustable interest rates using the SOFR index, the mortgagee should use the 30-day average SOFR, as published by the Federal Reserve Bank of New York.
The Federal Reserve Bank of New York publishes the 30-day average SOFR on its website.
The letter “also defines zero as a ‘floor’ for the index value used to determine the rate on the Notes to mitigate the uncertainty and risks posed by negative index rates,” the opinion continued. Further details are published in the ML.
“The HUD has now set the minimum value of the index used to determine the rating rate for all HECMs to zero to avoid sub-zero interest rates in a negative interest rate environment,” reads -on in the ML. “HUD provided loan document templates to include the requirements defined in this ML, including fallback language for future adjustable interest rate index transition events. “
Schedule of changes
For LIBOR loans still in the pipelines of lenders and brokers, the FHA specifies guidelines for relevant transactions with slight leeway.
“Mortgageors can use the 30-day average SOFR for annually adjustable HECMs where the HECM will close on or after May 3, 2021, provided the 10-year CMT is used to determine the expected average mortgage interest rate.” , indicates the ML. “Mortgage creditors must comply with their mortgage documents to meet the requirements of this ML. “
Additionally, existing LIBOR-based HECM loans closed before May 3, 2021 “are not affected by this ML,” he says. “The FHA will publish a policy regarding existing LIBOR contracts at a future date.”
The new ML also details the timeline for discontinuing FHA insurance eligibility for new HECM adjustable interest rate loans based on LIBOR, although the FHA specifies that it is important for mortgagees to “Consider the requirements of the HECM investor and the memorandum of all Ginnie Mae participants. 20-19 on March 1, 2021 deadline to make LIBOR-based adjustable interest rate HECM products ineligible for Ginnie Mae securitizations. “
One organization that has been at the center of discussions about the index’s imminent transition has been the National Reverse Mortgage Lenders Association (NRMLA), which has worked in consultation with the Alternative Reference Rates Committee (ARRC) and the Government National Mortgage Association. (GNMA, or “Ginnie Mae”) by keeping these authorities informed of the preferences and impacts on the reverse mortgage industry that result from a change of index.
The NRMLA hailed the HUD ruling, saying it will help secure the HECM program for some time.
“The NRMLA, on behalf of its members, appreciates the advice provided by the HUD via the mortgagee’s letter 2021-08,” Steve Irwin, president of NRMLA said in a statement to RMD. “Through its proper use of the authority granted by the Reverse Mortgage Stabilization Act, HUD has enacted a policy that will strengthen HECM’s place in a more widely accepted and mainstream mortgage market. This policy will also continue to enhance the safety and soundness of the HECM program, which is always a key factor in the development of HECM policies.
When contacted for comment, representatives of American Advisors Group (AAG) and Finance of America Reverse (FAR) referred to the statement provided by NRMLA. Representatives from Reverse Mortgage Funding (RMF) and Longbridge Financial declined to comment, citing the need to fully absorb the content of the ML.
Earlier this year, ARRC Vice President Tom Wipf described the need to end the LIBOR index quickly and the stated preference to move to SOFR as quickly as possible.
“The ARRC has focused on facilitating a smooth transition from USD LIBOR to a more robust alternative, called the Secure Overnight Finance Rate, or SOFR,” Wipf said in a column in Bloomberg. “With the support of the official sector, our members are committed to making this transition a success because it ultimately affects everyone.
The SOFR was chosen as a replacement index after more than two years of research to determine best practices and the potential ease or difficulty of such a change, finding through it the consultation and collection of information that the proposed objectives and SOFR’s ability to achieve them are “consistent,” Wipf described in his column.
For the reverse mortgage industry, Ginnie Mae last September announced new restrictions on the eligibility of Home Equity Conversion Mortgage Backed Securities (HECM) (HMBS) for interest rate loans. revisable operating from the LIBOR index, applicable to all HMBS issues dated on or after January 1, 2021, almost one year before the then scheduled termination of the index.
However, the January 1 date was revised to March 1, 2021 shortly thereafter, a new timeline was reportedly reached in consultation with the reverse mortgage industry. As recently as last week, the UK’s Financial Conduct Authority, which regulates the LIBOR index, announced that it will cease publication of LIBOR indices at one week and two months after December 31, 2021 and for all the LIBOR contracts remaining after June 30, 2023, effectively defining the definitive end of game for the LIBOR index. At this point, however, the reverse mortgage industry was still waiting for action from the FHA.
NRMLA’s official recommendation for selecting a new index was to adopt SOFR, due to its wider use in financial services, according to Michael McCully, partner at New View Advisors.
“We believe that moving to a niche index [like the CMT] for a niche product it is the opposite direction [we want to be moving in] that we are all trying to avoid, ”McCully said at the NRMLA annual meeting in November 2020.“ We are working really, really hard to make our industry [the providers of] a more mainstream financial solution, and we don’t think sticking with CMT, in the long run, will have the desired effect.
Read ML 2021-08 to the US Department of Housing and Urban Development (HUD).