The U.S. Department of Housing and Urban Development (HUD) this week posted a request for public comment in the Federal Register regarding the ultimate transition away from the beleaguered London Interbank Offered Rate (LIBOR) index for adjustable-rate mortgages (ARMs). The comment request relates to mortgagees offering both forward ARMs as well as adjustable-rate Home Equity Conversion Mortgages (HECMs), according to the document.

Considering the likelihood of operational difficulties for mortgagees making such an adjustment, questions about implementing a new index and legacy support for loans that have already used LIBOR as a basis have encouraged HUD to gather input from across the forward and reverse mortgage industries. The hope is that this action will ensure as smooth a transition as possible, according to the document.

Adjusting away from LIBOR for reverse mortgages

As it currently stands, a National Housing Act provision authorizes FHA to insure variable rate HECMs and impose additional eligibility requirements on HECMs, which could include requirements for HECM ARMs.

Earlier this year in Mortgagee Letter (ML) 2021-08, HUD officially announced that the HECM program would move away from the LIBOR index for adjustable-rate HECMs and instead adopt the Secured Overnight Financing Rate (SOFR). This change constituted long-awaited guidance from the federal government, approving the industry’s preferred index while providing a timeline for how and when HUD would implement the changes.

The ML also announced the new model Note language, included in the revised model loan documents for first and second HECM Adjustable Interest Rate Notes, and incorporating the changes described in the ML.

“HUD published revised model mortgage documents with ‘fallback’ language intended to address future interest rate index transition events,” HUD said in the Register this week. “This language was modeled after the Alternative Reference Rates Committee’s (ARRC) published fallback language for residential adjustable-rate mortgages.”

Regarding the rule changes now being debated by the Department, removing LIBOR and the addition of periodic adjustments based on other indices is one such potential measure.

“HUD intends to issue a proposed rulemaking to remove LIBOR as an available interest rate index and provide a new available index for periodic adjustments for newly-insured forward and HECM ARMs, to recommend a replacement comparable index for existing forward mortgages, and to implement a Secretary-prescribed replacement index for existing HECMs,” HUD said in the Register document. “Upon the cessation of LIBOR, a mortgagee would be able to replace LIBOR with the spread adjusted index approved by HUD.”

Lingering issues requiring comment

While the original ML describing the cessation of LIBOR for HECM ARMs features a lot of information and provisions authorized by law, the document said there are still some lingering questions that the Department is seeking input about from stakeholders.

“While HUD has already made certain regulatory amendments to the HECM ARM origination requirements in Mortgagee Letter 2021-08 pursuant to the authority granted in the Reverse Mortgage Stabilization Act of 2013 […], HUD will codify those requirements in the rulemaking,” the document says. “Also, HUD did not address the LIBOR transition for legacy HECM contracts in [ML] 2021-08.”

According to the document, one lingering question revolves around whether HUD should take different or uniform approaches between the forward and reverse mortgage programs.

“HUD seeks public comment on the best method of making such a transition for legacy loans and new originations,” the Register document reads. “For each of the questions [HUD poses] and regarding any other issue, HUD is interested specifically in public comment on whether and how HUD should take a different course of action for HECM and forward mortgages.”

One specific question that HUD is seeking direct comment on reads, “What issues do servicing mortgagees anticipate regarding HECM principal limit growth resulting from an index change?”

Additionally, current rules regarding the use of LIBOR as an index for interest rate adjustments for ARMs in both HUD’s forward and reverse mortgage insurance programs are “becoming obsolete,” the Department says, since LIBOR is in the active process of being phased out.

“HUD must […] amend by regulation its permitted interest rate indices for HECM ARM products and permit lenders to transition from LIBOR to a replacement index for existing HECM ARMs,” the document reads. “Therefore, this rule is necessary to avoid HUD’s rules on ARMs from becoming obsolete as well as to avoid the risk of financial harm for ARM lenders, borrowers, and the larger ARM market.”

This past July, ARRC announced that it is now formally recommending forward-looking SOFR term rates following the completion of a critical change in interdealer trading conventions that month. While on its own this does not have a direct effect on the trajectory of the reverse mortgage industry, it could provide for a valuable forward step when it comes to the ultimate adoption of term SOFR rates for the business.

Industry response

When reached for comment about the engagement of the reverse mortgage industry on these issues during the HUD commenting period, a robust discussion and ample data supporting the industry’s position will be submitted according to Steve Irwin, president of the National Reverse Mortgage Lenders Association (NRMLA).

“Through the work of the NRMLA HECM-backed Securities (HMBS) Issuers Committee, and through NRMLA’s participation on the Alternative Reference Rate Committee (ARRC), we have been anticipating this advance notice of proposed rulemaking regarding the LIBOR transition,” Irwin told RMD in an email. “The HMBS Issuers Committee will have a project team formed and we anticipate providing industry comments by the required deadline.”

That deadline currently sits at December 6, 2021. Read the document at the Federal Register.