The Federal Housing Administration (FHA) on Wednesday published the “Adjustable Rate Mortgages: Transitioning from LIBOR to Alternate Indices” final rule in the Federal Register, providing long-awaited guidance for adjustable-rate forward mortgage loans and Home Equity Conversion Mortgages (HECMs).

The rate index shift has been expected the London Interbank Offered Rate (LIBOR) index vulnerabilities were exposed nearly a decade ago. The LIBOR index was for years the basis for adjustable-rate reverse mortgages.

International investigations determined that LIBOR was vulnerable to widespread manipulation efforts identified between 2003 and 2012, and global regulators began to actively advise financial institutions to move away from the LIBOR standard by 2021 if possible.

The final rule

The final rule helps to codify the rate index for the HECM program going forward, according to an announcement from the FHA.

“In the final rule, FHA establishes the spread-adjusted Secured Overnight Financing Rate (SOFR) as a Secretary-approved index for the transition of existing FHA-insured adjustable rate mortgages (ARMs) from the London Interbank Offered Rate (LIBOR) index after the one-year and one-month LIBOR indices cease to be published after June 30, 2023,” the FHA said in an informational notice.

The rule also updates existing regulations by removing LIBOR and approving SOFR as an index for newly originated forward ARMs, and by codifying the HECM guidelines that were issued in Mortgagee Letter 2021-08, the agency said.

In addition, the rule clarifies regulatory changes to the requirements and establishes a 10 percentage point maximum lifetime adjustment cap for monthly HECM ARMs.

When reached, a HUD spokesperson told RMD that the new rule should not prove 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.

Reverse mortgage industry response

National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin welcomed the news and and praised the FHA for implementing changes between the proposed rule release and the final rule publication.

“We’re delighted that this final rule has been published,” Irwin said. “It will bring certainty to our marketplace and provide the necessary lead time for our members to update their systems. This timing also allows our servicers to begin communication with their borrowers to thoroughly explain how and why this change is happening.”

The new rule should also help align the HECM program and the industry, Irwin said.

“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,” he said. “We are also appreciative of the timing of the adjustment, and the rounding protocols are also greatly appreciated. We look forward to additional guidance through the Mortgagee Letters that are forthcoming.”

Recent history

In 2014, the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) to identify best practices for alternative rates and develop an implementation plan.

In mid-2019, the Ginnie Mae SVP in the Office of the President at the time, Michael Drayne, told reverse mortgage industry participants that the timing of a new rate index was a complex issue. In terms of HECM-backed Securities (HMBS), two alternative rates emerged as potential replacements: SOFR and the Constant Maturity Treasury (CMT) index. However, the majority of the reverse mortgage industry preferred SOFR due to its widespread use in financial services.

In September 2020, Ginnie Mae announced new restrictions on HMBS eligibility for adjustable rate loans operating off of the LIBOR index, which was effective for all issuances dated on or after January 1, 2021 — an announcement that came nearly a year prior to the planned move away from LIBOR. Action on a new reverse mortgage rate index had been tied to December 2021, and the September 2020 announcement caught many by surprise.

The decision regarding a new index for the reverse mortgage program rested with the FHA, however, and the industry waited several months to hear which direction the agency would go. ML 2021-08 announced that the HECM program move from the LIBOR index for adjustable-rate HECMs to SOFR.

The proposed version of the rule arrived in October of 2022, and NRMLA drew attention to reverse mortgage industry issues in a letter to FHA sent to the agency the following month. Concerns raised by the association are addressed in the final rule, NRMLA said in a member alert.

Editor’s note: This story has been updated to include a statement from a HUD spokesperson.