The FHA recently issued a mortgage letter. Mortgage letter 2021-08 (ML 21-08), which, among other things, removes the authorization to use the LIBOR index for HECMs with variable interest rates and sets the schedule for the discontinuation of FHA insurance for HECMs with LIBOR basis for variable interest rates.
In addition to revoking the authorization to use the LIBOR index, ML 21-08 stipulates, among other things: (i) the acceptance of the SOFR (Secured Overnight Financing Rate) index for setting the interest rate for HECMs with variable interest rates; (ii) allows mortgages to mix index types when SOFR is used as the index to determine the bond rate by using the US Constant Maturity Treasury (CMT) ten year swap rate to determine the expected average mortgage rate to determine the amount of determine loan capital available under such loans; and (iii) sets zero as the “lower bound” for the index value used to determine the rate of note for rate adjustable HECMs. In addition, ML 21-08 offers a new rate adjustable model note language for HECMs that is included in the revised rate adjustable HECM notes that are available Here.
The policy changes to the definition of the expected average mortgage rate, the rate index for annual floating rate HECMs, the monthly floating rate HECMs, and the rate index floor apply to HECMs closed on or after May 3, 2021. Note that all LIBOR-based HECMs must close on or before May 3, 2021 in order to be eligible for FHA insurance. With respect to the Notes revised model, starting March 11, 2021, mortgages can use the revised documents for all CMT-based HECMs and must use the revised documents for all SOFR-based HECMs. However, mortgages must use the revised Notes model for all floating rate HECMs that closed on or after July 1, 2021.
The FHA announced that it will issue guidelines on existing LIBOR contracts at a later date.