The Federal Housing Finance Agency announced [1] more steps that Fannie Mae and Freddie Mac are taking as they transition from the London Interbank Offered Rate (LIBOR)—the most widely used interest rate benchmark.
New language will be required for single-family Uniform Adjustable Rate Mortgage (ARM) instruments closed on, or after, June 1, 2020. Also, all LIBOR-based single-family and multifamily ARMs must have loan application dates on or before September 30, 2020, to eligible and acquisitions of single-family and multifamily LIBOR ARMs will stop on or before December 31, 2020.
“These steps represent important milestones in the Enterprises' transition away from LIBOR to a more robust reference rate. We will continue to monitor exposure to LIBOR and ensure the Enterprises manage the risks associated with the transition in a safe and sound manner," said FHFA Director Dr. Mark Calabria.
The FHFA states that the GSEs serve as members of the Alternative Reference Rates Committee (ARRC) established by the Federal Reserve Board and the Federal Reserve Bank of New York to facilitate the move from LIBOR to Secured Overnight Financing Rate.
According to the release, the ARRC published the final language on November 15, 2019, for new closed-end, residential ARMs.
“The fallback language provides clear direction on the selection of a replacement index in the event an index is no longer available,” the memo from the FHFA to Fannie Mae on LIBOR transition.
Discussion regarding moving away from LIBOR [2]between Ginnie Mae and the Department of Housing and Urban Development (HUD) can be traced to May 2019.
Michael Drayne, SVP of the Office of the President of Ginnie Mae, presented this topic at the National Reverse Mortgage Lenders Association [3] (NRMLA) Eastern Regional Meeting in New York last year.
The report states that international investigations found LIBOR was vulnerable to manipulation efforts identified between 2003 and 2012, and global regulators started actively advising financial institutions to move away from the LIBOR standard by 2021.
The Federal Reserve Bank of New York [4] in 2014 convened the Alternative Reference Rates Committee (ARRC) to identify best practices for alternate rates, while also developing an implementation plan.