FHA implements index rate shift, updates HECM model documents

The new ML implements HUD’s final rule in shifting away from the LIBOR index for adjustable-rate mortgages

The Federal Housing Administration (FHA) issued on Tuesday Mortgagee Letter (ML) 2023-09, which implements its final rule that shifts away from the London Interbank Offered Rate (LIBOR) index for adjustable-rate mortgages (ARMs) on the traditional and Home Equity Conversion Mortgage (HECM) sides of the business.

Following the publication of the LIBOR transition final rule, the ML implements the spread-adjusted Secured Overnight Financing Rate (SOFR) as an approved index by the Secretary of the U.S. Department of Housing and Urban Development (HUD).

“The ML provides direction to mortgagees on using the applicable Refinitiv USD IBOR Consumer Cash Fallback (“Refinitiv”) transition spread-adjusted SOFR tenor for transitioning existing ARMs from LIBOR to SOFR and the specific SOFR index for use in new ARM originations in Single Family Title II programs, including the [HECM]  program,” the FHA said in its announcement.

For monthly HECM ARMs, the FHA is also establishing a maximum lifetime note rate of up to 10% of the initial note rate in accordance with the final rule, according to the announcement.

The new ML also updates model HECM loan documents, which are revised to establish consistency with the new final rule and ML, and “to provide fallback language for future transition index transition events,” the FHA said.

In addition, the ML makes several changes to HECM policy. The effective date for transitioning existing LIBOR-indexed adjustable rate HECMs to the replacement index is the next interest rate adjustment date on or after the first London banking day after June 30. The new date is effectively immediately for the implementation of the new index on the origination of new HECM ARMs and the application of the HECM interest rate floor for new originations.

HECM mortgagees may begin using the newly-revised HECM model note immediately, but must use the revised model note for all case numbers assigned on or after July 1. The new HECM model note documents are available on HUD’s website.

“For adjustable interest rate HECMs indexed to the LIBOR, Mortgagees must transition the Mortgage from LIBOR to the [SOFR] index by using the applicable Refinitiv USD IBOR Consumer Cash Fallback (Refinitiv) spread-adjusted CME Term SOFR tenor replacement index […] to calculate the periodic adjustments to the mortgage interest rate,” the ML states.

The approved Refinitiv USD IBOR Consumer Cash Fallback CME Term SOFR tenor replacement indices can be found online for review.

Industry response to the FHA policy has been positive. When the final rule was unveiled in March, National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin said the choice of index should make participation in the HECM program easier by helping to align the program and the industry.

“I would want to say that by identifying the spread-adjusted SOFR as the LIBOR replacement, the department is helping to mainstream the HECM in the marketplace,” Irwin said. “We are also appreciative of the timing of the adjustment, and the rounding protocols are also greatly appreciated.”

At that time, a HUD spokesperson said the new rule should not be disruptive to the reverse mortgage industry.

“Transitioning to the SOFR index will allow the uninterrupted continuation of FHA-insured adjustable rate mortgages, including HECMs, that are currently tied to the soon-to-be retired LIBOR index,” the spokesperson said.

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