With LIBOR slated to be phased out at the end of 2021, industry trade group Structured Finance Association sent a letter this week to New York Gov. Andrew Cuomo and the state’s legislative leaders asking them to support Secured Overnight Financing Rate (SOFR) index as the standardized benchmark rate.
LIBOR is commonly used in setting the interest rate for many adjustable-rate consumer financial products and its end will affect adjustable and variable rate loans, reverse mortgages, credit cards, home equity loans, and adjustable-rate mortgages.
The SOFR index has been recommended by the Alternative Reference Rates Committee (ARRC) and already has the endorsement of the New York Federal Reserve.
“In the discussion around the transition away from LIBOR, New York is the center of the financial universe, with a substantial number of financial contracts governed by New York law,” said Michael Bright, CEO of the Structured Finance Association. “The state has a critical role to play in leading this transition, and we are hopeful it will take the steps necessary to provide clarity and promote financial stability. The ARRC’s proposal has strong market support and outlines a roadmap to an orderly transition. We encourage swift consideration.”
SOFR has already been widely adopted as a benchmark rate for highly reliable assets, and does not rely on self-reported data. The ARRC has insisted that SOFR is a much more resilient rate than LIBOR because of “how it is produced, and the depth and liquidity of the markets that underlie it.” According to the ARRC, “the volumes underlying SOFR are far larger than the transactions in any other U.S. money market. This makes it a transparent rate that is representative of the market across a broad range of market participants and protects it from attempts at manipulation.”
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LIBOR, an interest rate benchmark used in an estimated $200 trillion of financial transactions, is expected to be phased out by the end of 2021, though it may not happen until 2023. But its end has created a scramble to adopt a new benchmark as soon as possible.
Government sponsored entities Fannie Mae and Freddie Mac, which guarantee over half of the U.S. mortgage market, have already begun weening themselves off purchasing and issuing LIBOR-based products in favor of SOFR-based products.
“Throughout the past year we have worked to ease the transition away from LIBOR with more than 20 K-Deals that included bonds indexed to SOFR,” said Robert Koontz, senior vice president of Multifamily Capital Markets at Freddie Mac. “The collateral for those offerings was LIBOR-based and Freddie Mac covered the basis mismatch. With purchases of SOFR-indexed loans gaining momentum, we’re now able to offer the first tranche of SOFR bonds backed by SOFR collateral.”
Fannie Mae, meanwhile, has issued $136 billion worth of SOFR-linked debt offerings as of Nov. 30, the housing giant said. It has ceased issuing new LIBOR-indexed collateralized mortgage obligations and floating-rate debt securities indexed to LIBOR. It’s also on track to end single-family and multifamily purchases of LIBOR-based ARMs and delivery of MBS LIBOR Pools.
“The milestones that Fannie Mae achieved in 2020 are critical elements of the broader market’s transition away from LIBOR. It took significant organization, preparation, and thoughtful execution across the Enterprise. Because of Fannie Mae’s accomplishments, the company and the mortgage industry, are better positioned for the future, and we’ll continue the momentum in 2021,” said Bob Ives, Fannie Mae Treasurer.
Ginnie Mae, the government-owned corporation that securitizes loans backed by the Veterans Administration and the Federal Housing Administration, also said it won’t accept adjustable-rate mortgages benchmarked to LIBOR, starting in January.
The ARRC was convened by the Federal Reserve in cooperation with other regulatory and official sector agencies to develop recommendations to facilitate the transition away from U.S. dollar LIBOR.