ARRC Outlines Definitive Endgame for LIBOR Index, Reverse Mortgage Pros Await FHA

The United Kingdom Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR) index, will cease publication of the one-week and two-month LIBOR indices after December 31, 2021 and for all remaining LIBOR contracts after June 30, 2023. This is according to a statement published by the Alternative Reference Rates Committee (ARRC), an organization co-convened by the Federal Reserve Bank of New York to find a new rate index after weaknesses in LIBOR were exposed.

ARRC commended the announcement, saying that a definitive roadmap on the end of LIBOR panels will help to repair spread adjustments in the Interbank Offered Rate (IBOR) protocol offered by the International Swaps and Derivatives Association (ISDA) and, “in conjunction with previous U.S. supervisory guidance about stopping new U.S. dollar (USD) LIBOR issuances this year, should accelerate market participants’ move away from USD LIBOR,” the statement said.

ARRC statement

“The end of this long transition road is clear. We now know when a representative USD LIBOR will end and what its associated spread adjustments will be in no uncertain terms,” said Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley in ARRC’s statement. “As the ARRC continues driving the transition to [the Secured Overnight Financing Rate (SOFR)] forward, we have a straightforward plan for how this will work: with no new USD LIBOR contracts by the end of this year and further time for many legacy contracts to wind-down.”

Today also saw the Intercontinental Exchange (ICE) Benchmark Administration (IBA) issue a statement describing that feedback on its December 2020 consultation confirmed dates it proposed to stop publishing USD LIBOR on “a representative basis,” the ARRC statement said.

“Specifically, the U.K. Financial Conduct Authority announced that the publication of LIBOR on a representative basis will cease for the one-week and two-month USD LIBOR settings immediately after December 31, 2021, and the remaining USD LIBOR settings immediately after June 30, 2023,” ARRC said.

ISDA specified that these announcements constitute what’s called an “index cessation event,” and that when panels for LIBOR USD tenors cease in June 2023, “fallbacks for derivatives under ISDA’s documentation would shift to forms of the Secured Overnight Financing Rate (SOFR) plus the spread adjustment that has now been fixed. The ARRC has stated its recommended spread adjustments for fallback language in non-consumer cash products will be the same as the spread adjustments applicable to fallbacks in ISDA’s documentation for USD LIBOR,” the statement reads.

The decision was similarly lauded by leadership from the Federal Reserve Board and New York Fed, co-conveners of ARRC.

“Together with the actions taken at the end of last year, these announcements provide a clear end-date for USD LIBOR and a clear path for the change to alternative reference rates,” said Randal K. Quarles, Vice Chair for Supervision at the Federal Reserve Board and Chair of the Financial Stability Board. “As promised, the official sector has worked closely with all parties to ensure this transition is fair, transparent, and predictable. In the months ahead, supervisors will focus on ensuring that firms are managing the remaining transition.”

Reverse mortgage industry’s eyes on FHA

In an email circulated to members of the National Reverse Mortgage Lenders Association (NRMLA), the reverse mortgage trade association made plain that the matter as it pertains to the reverse mortgage industry is not yet settled until housing authorities of the U.S. federal government weigh in.

“While this is welcome news, NRMLA is still dependent on the Federal Housing Administration (FHA) to adopt these same timelines for existing Home Equity Conversion Mortgage (HECM) loans tied to LIBOR,” the association said in its email to members.

NRMLA has been active in the process of transitioning the reverse mortgage industry away from the LIBOR index, having separately formed a working group of subject matter experts across several of its own committees to discuss courses of action the industry can take and is in consultation with FHA and the Government National Mortgage Association (GNMA, or “Ginnie Mae”) on the matter.

Recent history

Earlier this year, ARRC Vice Chairman Wipf described the necessity to move quickly on an end to the LIBOR index, and the stated preference to move to SOFR in as expedient a manner 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, or SOFR,” Wipf said in a column at Bloomberg. “With the official sector’s support, our members are committed to making this transition a success because it ultimately affects everyone.”

SOFR was selected as the replacement index after over two years of research in determining best practices and the potential ease or difficulty of such a shift, finding through it consultation and information gathering that it proposed goals and the ability of SOFR to fulfill them are “consistent,” Wipf described in his column.

For the reverse mortgage industry’s part, Ginnie Mae announced last September new restrictions on the eligibility of Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) for adjustable rate loans operating off of the LIBOR index, effective for all HMBS issuances dated on or after January 1, 2021, nearly a year ahead of the then-planned sunset of the index.

However, the January 1 date was revised to March 1, 2021 shortly thereafter, a new timeline reportedly reached in consultation with the reverse mortgage industry. The official recommendation from NRMLA regarding the selection of a new index is to adopt SOFR, due to its wider use in the realm of financial services according to Michael McCully, partner at New View Advisors.

“We believe that moving to a niche index [like the CMT] for a niche product is the opposite direction [we want to be moving in] that we all are attempting to avoid,” McCully said at the NRMLA Annual Meeting in November. “We’re really working very hard to make our industry [the providers of] a more mainstream financial solution, and we don’t believe that remaining with CMT, for the long term, will have that intended effect.”

Read ARRC’s announcement at the New York Fed.

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