The move away from the LIBOR was expected, the sudden deadline for HMBS was not
Last Monday Ginnie Mae, the government bond-insurer, declared the agency will no longer accept any mortgage-backed securities or MBSs attached to the LIBOR index. The policy effective date for HECM loans is January 1st, while traditional mortgage-backed securities restrictions go into effect January 21, 2021.
Our industry’s adoption of the LIBOR index began with d issued October 12, 2007. It permitted FHA to insure HECM loans using either a 1-year LIBOR index for annually adjustable loans and the 10-year swap rate for monthly-adjustable HECMs. By 2008 most lenders had switched to the new index.
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During the transition to a new index trouble was brewing for the LIBOR. Between 2003 and 2013 global regulators advised financial institutions to move away from the index. The troubled LIBOR faced even more scrutiny in 2012 when Barclay’s Bank entered into several criminal settlements which revealed fraud and rate manipulation by colluding banks. The legitimacy of a benchmark lending and financial institutions used across the globe was officially tainted.
Back to last week. While Ginnie Mae’s move away from the LIBOR index was anticipated the announcement of a fast-approaching deadline caught many by surprise as the transition to a new interest rate index had not yet been finalized for the Home Equity Conversion Mortgage.
In July 2017 Reverse Mortgage Daily reported on industry plans to work to implement a replacement index before changes take place. In May 2019 Michael Drayne, SVP of the Office of the President of Ginnie Mae discussed the impending index change at the NRMLA Eastern Regional Meeting in New York saying, “The amount of time we have to figure everything out is less reassuring the more you look at how complicated this problem is.” Drayne headed the effort to work with lenders who issue securities in both the traditional and reverse markets. During Reverse Mortgage Daily’s July 2020 Summer Virtual Meeting New View Advisors Michael McCully said our industry stakeholders were working to take “active steps to prepare for the sunset” of the index. He added, “Our principal concern is that we want our industry to adopt the same widely recognized liquid, mainstream global index or set of indices that the rest of the mortgage industry [will use]. We want to be lockstep with the rest of the financial markets, and do not want to end up having a different index than the rest of the financial markets and financial world uses. That’s our overriding objective.”
According to a recent column in TheMReport traditional mortgage lenders moved away from the LIBOR more quickly than their reverse mortgage counterparts. Bonnie Sinnock writes this in the American Bankers Asset Securitization Report. “Due to historically low fixed rates and plans to phase out Libor, traditional ARM securitization at Ginnie has declined notably in the past year. It was $12 million in August, down from $68 million during the same month the previous year. In comparison, newly securitized reverse mortgages continue to run at a rate of $500 million to $600 million per month on average, according to capital markets consultancy New View Advisors.”
What transpired between the ongoing discussions between Ginnie Mae, HUD, the Federal Reserve’s Alternative Reference Rates Committee, and our industry stakeholders leading to a sudden deadline remains to be seen. The good news is our industry has a long established history in using the CMT (Constant Maturity Treasury) rate. In addition, the HECM’s adjustable rate note states if an index is unavailable one can be prescribed by the Secretary of HUD. To date no official rate index has been announced by HUD. In its August 4th letter to the Consumer Financial Protection Bureau NRMLA appealed to use an index that is ultimately adopted by HUD which has similar historical rate fluctuations as the former LIBOR index.
Additional resources cited:
The MReport column on stoppage of LIBOR-based MBS
The Asset Report / American Banker article
NMRLA’s letter to the CFPB on choice of replacement index [/read]
1 Comment
It is odd that so many were surprised about the announcement since the NRMLA issuers were supposedly in negotiations with Ginnie Mae, the Fed’s ARRC, and it appears ICE. Was this another case of a NRMLA committee starting the process too late? Was Ginnie Mae seeing no daylight in its negotiations or just what caused this “surprising announcement.”
Will SOFR be our next index or could it be CMT? CMT is already an acceptable FHA index for HECMs but it is less popular with investors than LIBOR and would no doubt provide lower premiums which would be currently offset to some degree by a higher lender margin since the current CMT interest rates are lower than the LIBOR interest rates.
Shannon did a great job researching for this vlog.