Ginnie Mae, the government-owned corporation that securitizes loans backed by the Veterans Administration and the Federal Housing Administration, said it won’t accept adjustable-rate mortgages benchmarked to the London Interbank Offer Rate, or LIBOR, starting in January.
For home equity conversion mortgages, known as reverse mortgages, the ban starts Jan. 1. For regular ARMs, the cut-off date is Jan. 21. ARMs indexed to the constant maturity Treasury index will continue to be pooled without restriction, Ginnie Mae said in a statement.
LIBOR is being phased out almost a decade after regulators discovered traders were manipulating the rate set by Britain’s biggest banks. Before details of the scandal were unveiled in 2012 by investigative journalists, LIBOR was the most popular index for ARMs originated in the U.S.
U.S. regulators have been working for years to replace the rate with another benchmark such as the Secured Overnight Financing Rate, or SOFR, which tracks the U.S. Treasury’s repo market where investors offer banks overnight loans backed by their bond assets.
The decision to ban LIBOR-linked ARMs comes at a low point for the product that decades ago dominated the market. In 2005, near the height of the housing boom, almost half of all mortgages were ARMs, which typically meant they had an initial fixed period of five or seven years followed by annual adjustments linked to a benchmark like LIBOR.
As fixed rates have tumbled to all-time lows this year, the market share of ARMs has shrunk. Almost one-in-10 mortgages originated in December 2018 were ARMs, according to Ellie Mae data. Last month, the share was 2.8%.
The LIBOR is set to expire at the end of 2021, meaning it will no longer be calculated and published each day by the Intercontinental Exchange.