Efforts by the reverse mortgage industry to completely end the use of the London Interbank Offered Rate (LIBOR) index on HECM (Home Equity Conversion Mortgage) loans have been accompanied by industry input, particularly the efforts of the National Reverse Mortgage Lenders Association (NRMLA) and certain industry players in discussions with the US Department of Housing and Urban Development (HUD) and the Government National Mortgage Association (GNMA or “Ginnie Mae”).
This emerged from a panel held at the NRMLA Virtual Policy Conference last month that included an update on the industry’s efforts to roll out a new index – preferably the Secured Overnight Financing Rate (SOFR) – on which the New View Advisors were invited -Partners Michael McCully and Reverse included Joe DeMarkey, Head of Strategic Business Development for Mortgage Financing (RMF).
Effects of the mortgage letter
In March, the HUD and the Federal Housing Administration (FHA) released Mortgagee Letter 2021-08, in which it was officially announced that the HECM program would deviate from the LIBOR index for HECMs with variable interest rates and instead adopt the SOFR. The letter provided long-awaited guidance from the federal government and “withdraws approval for the use of the LIBOR index for variable rate HECMs,” approving the industry-preferred SOFR index and setting a schedule for implementation and timing of the Changes is provided.
In general, the ML has been well received by industry stakeholders and the trade association who submitted an additional letter to the GNMA on how some of the provisions in the ML could be further improved, McCully said.
“[The ML] allows indices to be mixed, especially for calculating the expected reserve. This was a challenge that the industry faced a year ago and that this mortgage letter solved. We are very pleased that this is the case, ”said McCully. “And it is set as Floor 0 for the index itself. There were a handful of technical improvements we saw room for, and NRMLA submitted our comment which gathered industry observations and thoughts on how we could improve this letter. “
However, in terms of the impact and reception of ML itself in the reverse mortgage industry, it has been very well received, McCully said.
“The mortgage letter has been very well received and we look forward to hearing back on some of our comments,” he said. “In particular, the use of SOFR not only for the annually adjustable HECM, but also for the monthly adjustable HECM.”
LIBOR continues to be used
However, the LIBOR index continues to be used for tail issuance of previously borrowed HECM loans in existing books, and the fact that it does remains a critical issue for the reverse mortgage industry, McCully says.
“The impact of a sudden change in the index on these existing ledgers could potentially harm the industry and we are very careful in monitoring progress in continuing to use LIBOR on this existing ledger,” said McCully. “And with it the British Financial Conduct Authority at the beginning of March announced The formal termination date for LIBOR has been extended to June 30, 2023, i.e. in just over two years. “
While this new termination date gives the American reverse mortgage industry time to smoothly transition from LIBOR for existing books, McCully says, the issue remains important to industry stakeholders and the trade association.
“This remains a very important issue for us at NRMLA and for the industry, and we are in regular contact with the FHA and Ginnie Mae on this matter,” he said.
Adaptation to CMT in the meantime
Abruptly last fall announcement GNMA detailed new restrictions on the eligibility of HECM-Backed Securities (HMBS) for floating rate loans, based on the LIBOR index and applicable to all HMBS issues on or after January 1, 2021, nearly one year prior to then scheduled time sunset of the index.
However, the date was January 1st revised by March 1, 2021 shortly thereafter, a new schedule should have been reached consultation with the reverse mortgage industry. The reverse mortgage industry meanwhile switched to the previously used Constant Maturity Treasury (CMT) index, an adjustment that was made surprisingly easily, according to McCully.
“We are pleased that the capital markets have received CMBS-based HMBS better than we all expected,” he said. “It is important that everyone knows that we assume SOFR is the index over the long term, but that it is not guaranteed. However, the SOFR market is still brand new and very immature. It takes time to develop enough liquidity to generate the indices we all hope will one day, and we are in the “first inning” of that timeline right now. “
McCully and others believe that futures indices will become available over time, that is, those that go beyond a one-month index, i.e. periods of three, six, and possibly 12 months. At this point, it’s too early to know for sure, he says. Even so, there is another important consideration.
“The other important point here is that Ginnie Mae has not yet changed his rules for approving SOFR,” says McCully. “This is an important factor that we have to take into account. And even with this mortgage letter published by HUD a few months ago, there are no specific deadlines in this mortgage letter. So it is up to us as an industry and HUD to work together to find out when these indices are ready, when they are available, when they are widely distributed and when the market is ready to view SOFR as an index that we are officially moving away from LIBOR to SOFR. “
Taking up the baseball inning analogy used by McCully, Joe DeMarkey of RMF wanted to highlight the work that remains to be done as the industry seeks to facilitate a full transition from LIBOR, including for proprietary reverse mortgage products.
“Of course, there is a lot more work to be done: some within our control, some beyond our control, like developing a forward curve with lots of liquidity where a Federal Reserve administrator can post forward rates that may be more comparable to those the industry is used to, ”DeMarkey said. “[Something like] a month-long or year-long LIBOR. “
Also addressed was the way in which proprietary reverse mortgages are currently intertwined with the outgoing index.
“Most of them now use a three-month LIBOR for proprietary products,” DeMarkey said. “And we hope that the equivalent of a SOFR index with this duration will develop here in the not too distant future. So much more has to happen. “