The Federal Housing Administration (FHA) officially announced on Thursday that the Home Equity Conversion Mortgage (HECM) program is departing from the London Interbank Offered Rate (LIBOR) index for HECMs with floating rate and instead uses the Secured Overnight Financing Rate (HECM) takes over. SOFR). This became official with the publication of the Mortgagee Letter (ML) 2021-08 published Thursday morning.
In long-awaited guidelines from the federal government, the new ML “revokes approval to use the LIBOR index for HECMs with floating rates,” approves the industry-preferred SOFR index, and provides a timetable for how and when the changes will be implemented .
SOFR as an approved new index
“[This ML] approves the Secured Overnight Financing Rate (SOFR) index and allows mortgages to mix index types for newly emerging annual variable rate HECMs when the expected average mortgage rate using the US Constant Maturity Treasury (CMT) and the initial mortgage rate (note) rate is determined) and periodic note rate adjustments using the SOFR index, ”says an FHA INFO note on the new guidelines.
The ML is also announcing a new Model Note Language which will be included in the revised Model Loan Documents for the first and second HECM Adjustable Rate Notes that will incorporate the changes described in the new ML. Revised sample loan documents are now available as a resource on the FHA Website for sample documents for single-family mortgages.
In the ML itself, the guidelines in which regulations are revised and listed in conflict areas are replaced by the new guidelines.
“Mortgages may no longer be able to build variable rate HECMs using the LIBOR index, but may be able to build the CMT or SOFR indices,” the ML says. “For all variable rate HECMs, the mortgage borrower must use the 10 year CMT to determine the expected average mortgage rate. For annual variable rate HECMs using the SOFR index, the mortgage borrower must use the 30-day SOFR published by the Federal Reserve Bank of New York. “
The Federal Reserve Bank of New York publishes the 30-day average SOFR on their website.
The letter also sets “zero” as the “minimum amount” of the index value that is used to determine the interest rate in order to mitigate uncertainty and risk from negative index rates, “the press release said. Further details will be published in the ML.
“HUD has now set zero as the minimum index value used to determine the note rate for all HECMs to keep rates from going below zero in a negative rate environment,” the ML says. “HUD has provided sample loan documents that include the requirements defined in this ML, including the fallback language for future transition events with adjustable interest rate indices.”
Timeline for changes
For LIBOR loans that are still in the pipelines of lenders and brokers, the FHA sets guidelines for relevant, low-margin transactions.
“Mortgages can use the 30-day average SOFR for annually adjustable HECMs where the HECM closes on or after May 3, 2021, provided the 10-year CMT is used to determine the expected average mortgage rate,” says the ML. “Mortgages need to adjust their mortgage documents to meet the requirements of this ML.”
In addition, existing LIBOR-based HECM loans that were closed prior to May 3, 2021 will remain “untouched by this ML,” it said. “The FHA will issue guidelines for existing LIBOR contracts at a later date.”
The new ML also details the schedule for retiring FHA insurance eligibility for new LECOR-based HECM variable rate loans. However, the FHA states that it is important for mortgages to “respect the requirements of the HECM investor and Ginnie Mae’s All Participant Memorandum 20-19 in relation to March 1, 2021, deadline to submit LIBOR-based HECM- To stop Ginnie Mae from making variable rate products eligible for securitisations. “
One organization that was at the center of discussions about the upcoming index transition was the National Reverse Mortgage Lenders Association (NRMLA), which worked in consultation with the Alternative Reference Rates Committee (ARRC) and the Government National Mortgage Association (GNMA) “Ginnie Mae “) to keep these authorities informed of the preferences and impact of an index change on the reverse mortgage industry.
NRMLA praised the HUD’s decision and said this will help secure the HECM program for some time.
“NRMLA, on behalf of its members, appreciates the guidance that HUD has issued on Mortgagee Letter 2021-08,” said Steve Irwin, President of NRMLA, in a statement to RMD. “By making appropriate use of the powers granted under the Reverse Mortgage Stabilization Act, HUD has promulgated a policy that will strengthen HECM’s place in a generally accepted and established mortgage market. This policy will continue to improve the security and soundness of the HECM program, which is always an important part of the development of the HECM policy. “
Representatives of the American Advisors Group (AAG) and the Finance of America Reverse (FAR) have relied on an opinion from the NRMLA. Reverse Mortgage Funding (RMF) and Longbridge Financial representatives declined to comment, citing the need to fully incorporate the content of the ML.
Earlier this year, ARRC Vice Chairman Tom Wipf described the need to exit the LIBOR index quickly and a stated preference to switch to SOFR as expediently as possible.
“The ARRC has focused on facilitating a smooth transition from USD LIBOR to a more robust alternative called the Secured Overnight Financing Rate (SOFR),” Wipf said in one pillar at Bloomberg. “With the support of the official sector, our members are committed to making this transition a success as it ultimately affects everyone.”
SOFR was chosen as the replacement index after more than two years of research to identify best practices and the potential ease or difficulty of such a shift. It was found that the proposed goals and the ability of SOFR to meet them are “consistent”, “Wipf described in his column.
For the reverse mortgage industry, Ginnie Mae announced Last September, new restrictions on the eligibility of Home Equity Conversion Mortgage (HECM) backed securities for floating rate loans based on the LIBOR index for all HMBS issues on or after January 1, 2021, nearly passed Year in advance, effective from the then planned 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. Just last week, the UK’s Financial Conduct Authority, which regulates the LIBOR index, announced The publication of the weekly and two-month LIBOR indices will cease after December 31, 2021 and for all remaining LIBOR contracts after June 30, 2023, effectively setting the final endgame for the LIBOR index. At this point, however, the reverse mortgage industry was still waiting for action from the FHA.
The official recommendation from the NRMLA regarding the selection of a new index, according to Michael McCully, partner at New View Advisors, was to introduce SOFR due to its wider use in financial services.
“We believe we are moving to a niche index [like the CMT] for a niche product is the opposite direction [we want to be moving in] We all try to avoid that, ”said McCully said at the NRMLA annual meeting in November 2020. “We are really working very hard to make our industry [the providers of] a more general financial solution and we do not believe staying with CMT long term will have this intended effect. “
Read ML 2021-08 at the US Department of Housing and Urban Development (HUD).