As the industry continues to prepare for the London Interbank Offered Rate (“LIBOR”) to be phased out by the end of 2021, the focus includes how to transition to the Secured Overnight Financing Rate (“SOFR”) as a new benchmark index. The Federal Reserve Bank of New York began publishing SOFR, an overnight interest rate based on U.S. dollar Treasury repurchase agreements, in April 2018 as part of an effort to replace LIBOR. It publishes the 30-, 90- and 180-day SOFR Averages as well as an overnight SOFR index.
The Alternative Reference Rate Committee (“ARRC”) recently published a Best Practices guide with recommended timelines and key milestones to assist stakeholders prepare for end of LIBOR including dates after which no new LIBOR activity should be conducted. ARRC developed the guidance to “help minimize market disruptions and support a smooth transition to the adoption of SOFR”, which ARRC recommended as an alternative reference rate.
Recommended steps for consumer loans include:
- New closed-end residential mortgages referencing LIBOR should include the ARRC’s fallback language recommendations by June 30, 2020.
- Third-party technology and operations vendors relevant to consumer mortgages should complete all necessary enhancements including the capability to support SOFR and USD LIBOR concurrently by September 30, 2020.
- No new closed-end residential mortgages applications using USD LIBOR and maturing after 2021 should be accepted after September 30, 2020.
- By December 31, 2020, servicers of any consumer loans using LIBOR and maturing after 2021, should have developed robust programs for notifications and consumer education and outreach to the borrowers. They should ensure that their planned notifications are compliant with all relevant consumer regulations.
Following the release of ARRC’s Best Practices, Fannie Mae and Freddie Mac (the “GSEs”) jointly published a new LIBOR Transition Playbook which includes guidance and timelines regarding the transition from the LIBOR to SOFR index. Also, Fannie Mae and Freddie Mac have each create a website resource page that includes joint LIBOR Transition FAQs and a timeline outlining key dates for transition milestones.
Timeline milestones announced by the GSEs include:
- September 30, 2020 as the last Application Received Date for LIBOR loans to be accepted by the GSEs
- December 1, 2020 as the last MBS/Guarantor PC issue date for LIBOR-indexed ARM pools
- December 31, 2020 as the last date for cash/whole loan purchase of LIBOR-indexed ARMs
Fannie Mae and Freddie Mac previously announced SOFR-indexed ARM products that utilize the 30-day Average SOFR index and a 6-month reset instead of the traditional one-year reset. Because of the shorted reset period, the periodic adjustment cap has been limited to one percentage point. The FAQs indicate a lower periodic cap is meant to safeguard against unexpected payment increases and remain consistent with current market practices.
DocMagic will be introducing new programs in July utilizing the 30-Day Average SOFR index (3/6 MO, 5/6 MO, 7/6 MO, 10/6 MO). DocMagic’s previous articles regarding the end of LIBOR can be found here and here.
To view Fannie Mae’s resource website, click here.
To view Freddie Mac’s LIBOR transition resource webpage, click here.
