ARRC describes final final phase of LIBOR index, reverse mortgage pros await FHA
The UK Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR) index, will cease publication of LIBOR indices at one week and two months after December 31, 2021 and for all remaining LIBOR contracts after December 30, 2021. June 2023. This is according to a statement released by the Alternative Reference Rates Committee (ARRC), an organization co-organized by the Federal Reserve Bank of New York to find a new rate index after LIBOR weaknesses were exposed. .
The ARRC welcomed the announcement, saying that a definitive roadmap on ending LIBOR panels will help repair spread adjustments in the Interbank Offered Rate (IBOR) protocol proposed by the International Swaps and Derivatives Association (ISDA). ) and, “together with previous US prudential advice on stopping new issuance of US dollar (USD) LIBOR this year should accelerate the abandonment of USD LIBOR by market participants,” the communicated.
“The end of this long road of transition is clear. We now know when a representative USD LIBOR will end and what its associated spread adjustments will be in clear terms, ”said Tom Wipf, Chairman of ARRC and Vice Chairman of Institutional Securities at Morgan Stanley in the ARRC statement. . “As the ARRC continues to lead the transition to [the Secured Overnight Financing Rate (SOFR)] Going forward, we have a simple plan for how this will work: without any new USD LIBOR contracts by the end of this year and more time for many legacy contracts to end. “
Today, the Intercontinental Exchange (ICE) Benchmark Administration (IBA) also released a statement describing that comments on its December 2020 consultation confirmed the dates it proposed to stop posting USD LIBOR on “a representative base, “according to the ARRC press release.
“Specifically, the UK Financial Conduct Authority announced that publication of LIBOR on a representative basis would cease for the one week and two month USD LIBOR parameters immediately after December 31, 2021, and the remaining USD LIBOR parameters immediately. after June 30, 2023, ”the ARRC said.
The ISDA clarified that these announcements constitute what is called an “index termination event” and that when the panels for the tenors LIBOR USD cease in June 2023, “the fallbacks for derivatives according to the documentation of ISDA would move to forms of guaranteed overnight funding rate (SOFR) plus the spread adjustment which has now been corrected. The ARRC has stated that its recommended spread adjustments for fallback language in non-consumer cash products will be the same as the spread adjustments applicable to fallbacks in the ISDA documentation for USD LIBOR ”, indicates the press release.
The move was also welcomed by the heads of the Federal Reserve and the New York Fed, co-organizers of the ARRC.
“With the actions taken late last year, these announcements provide a clear end date for USD LIBOR and a clear path for the change to alternative benchmark rates,” said Randal K. Quarles, vice-president. chairman of supervision in the federal administration. Reserve Board and Chairman of the Financial Stability Board. “As promised, the official sector has worked closely with all parties to ensure this transition is fair, transparent and predictable. Over the coming months, supervisors will focus on making sure companies manage the rest of the transition. “
The reverse mortgage industry’s eyes on the FHA
In an email distributed to members of the National Reverse Mortgage Lenders Association (NRMLA), the reverse mortgage trade association made it clear that the issue regarding the reverse mortgage industry has yet to be resolved. that the housing authorities of the US federal government did not speak.
“While this is good news, the NRMLA still depends on the Federal Housing Administration (FHA) to adopt these same timelines for existing LIBOR-linked home equity conversion mortgages (HECMs),” the association said in his email to members.
NRMLA has been active in the process of transitioning the reverse mortgage industry away from the LIBOR index, having separately formed a working group of subject matter experts in several of its own committees to discuss measures the industry can take. take and is in consultation with the FHA. and the Government National Mortgage Association (GNMA, or “Ginnie Mae”) on the matter.
Earlier this year, ARRC Vice President Wipf described the need to end the LIBOR index quickly and the stated preference to move to SOFR as quickly as possible.
“The ARRC has focused on facilitating a smooth transition from USD LIBOR to a more robust alternative, called the Secure Overnight Finance Rate, or SOFR,” Wipf said in a statement. column at Bloomberg. “With the support of the official sector, our members are committed to making this transition a success because it ultimately affects everyone.
The SOFR was chosen as a replacement index after more than two years of research to determine best practices and the potential ease or difficulty of such a change, finding through it the consultation and collection of information that the proposed objectives and SOFR’s ability to achieve them are “consistent,” Wipf described in his column.
On behalf of the reverse mortgage industry, Ginnie Mae announcement last September, new restrictions on the eligibility of mortgage-backed securities for home equity conversion (HECM) (HMBS) for floating rate loans operating outside the LIBOR index, in effect for all issues of HMBS dated January 1, 2021 or later, nearly a year in advance of the index’s then forecast sunset.
However, the date of January 1 was amended on March 1, 2021 shortly thereafter, a new deadline would have been reached in consultation with the reverse mortgage industry. The official NRMLA recommendation for selecting a new index is to adopt SOFR, due to its wider use in financial services, according to Michael McCully, partner at New View Advisors.
“We believe that moving to a niche index [like the CMT] for a niche product it is the opposite direction [we want to be moving in] that we all try to avoid ”, McCully noted at the NRMLA annual meeting in November. “We are working really, really hard to make our industry [the providers of] a more common financial solution, and we don’t think sticking with CMT, in the long run, will have the desired effect.
Read ARRCs announcement at the New York Fed.