FHA Issues Guidelines For Removing LIBOR From HECM Program | Weiner Brodsky Kider PC
The FHA recently issued a mortgage creditor letter, Letter from the mortgagee 2021-08 (ML 21-08), which, among other things, removes the approval of the use of the LIBOR index for adjustable rate HECMs and sets the timetable for the termination of FHA insurance eligibility for Adjustable rate HECM based on LIBOR.
In addition to removing the authorization to use the LIBOR index, among others, ML 21-08: (i) establishes the acceptance of the Guaranteed Overnight Funding Rate (SOFR) index for setting the interest rate on the adjustable rate HECM notes; (ii) allows mortgagees to mix types of indices, when SOFR is used as an index to fix the rate of the notes, using the ten-year constant maturity US Treasury swap rate (CMT) at the time of the Establishing the average expected interest rate for the mortgage loan to determine the amount of loan principal available under those loans; and (iii) sets zero as a “floor” for the value of the index used to determine the rate of the Notes on the Adjustable Rate HECMs. In addition, ML 21-08 provides a new grade language model for variable rate HECMs, which is included in the revised adjustable rate HECM grade template that are available. here.
Changes to the definition of the expected average mortgage interest rate, the interest rate index for annual adjustable rate HECMs, monthly adjustable rate HECMs and the floor index of interest rates s ‘apply to HECMs closed as of May 3, 2021. Note that all LIBOR HECMs must close by May 3, 2021 to be eligible for FHA insurance. With respect to the revised Notes template, effective March 11, 2021, mortgagees can use the revised documents for all CMT-based HECMs and must use the revised documents for all SOFR-based HECMs. However, mortgagees must use the revised note template for all variable rate HECMs closed as of July 1, 2021.
The FHA has said it will issue guidance regarding existing LIBOR contracts at a later date.