Answer to LIBOR Issue Written in Reverse Mortgage Notes, Questions Remain

When British banking authorities in July announced the eventual death of LIBOR, the reverse mortgage industry was faced with the long-term task of replacing the backbone benchmark for adjustable-rate Home Equity Conversion Mortgages. While much can change between now and LIBOR’s planned trip out to pasture in 2021, the solution to one problem might be easier than expected.

Dan Hultquist, director of learning and development at the ReverseVision software firm, told RMD that he was initially concerned about what would happen to existing HECMs at the time of the switch, since there might not be a contingency plan for swapping out benchmarks on extant mortgages. So he dug into the text of a model adjustable rate note from the Department of Housing and Urban development, and to his surprise, found that HUD had planned for this exact eventuality.

Right there in section 5, titled “Interest Rate Changes,” subsection B stipulates that at the time of a specified “change date,” the interest rate will be based on a given index “chosen by the Borrower.”


The next paragraph explains what happens should that index disappear.

“If the Index is no longer available, Lender will use as a new Index any index prescribed by the Secretary,” the document continues — essentially saying that the lender can simply switch to the already-approved Constant Maturity Treasury rate, which remains HUD-certified for use.

Of course, the HUD secretary — either current department chief Ben Carson or his potential future successor — could approve a new standard between now and then. But Hultquist emphasized that if the LIBOR went away tomorrow, the solution could be as simple as putting letters in the mail notifying borrowers of the change.

“That’s amazing to me, that HUD actually had the foresight to say: ‘What happens if an index goes away? And maybe we should put that into a note,’” Hultquist said.

Meanwhile, since this article was originally published, several authorities have weighed on the viability of a LIBOR replacement, including this take from Mark Gilbert at Bloomberg Businessweek. In a column that veers from serious to tongue-in-cheek, Gilbert argues that the Financial Conduct Authority, the British agency that oversees LIBOR, can simply revamp the benchmark instead of abandoning it entirely.

To combat the authority’s assertion that there isn’t enough inter-bank lending to provide an accurate backbone for LIBOR, Gilbert suggests that the FCA use corporate bonds, the commercial paper market, and other existing metrics to calculate the benchmark.

“Instead of ditching LIBOR and making lawyers rich amid a scramble to rewrite the gazillion contracts that are tied to the benchmark, maybe just changing the composition and calculation of LIBOR makes more sense,” Gilbert writes.

Then, for his flippant conclusion, Gilbert also makes a last-ditch recommendation should all other efforts fail.

“Send the body that calculates the benchmark down to its local sports store, buy 16 sets of dartboards and darts, set up an interest-rate wall in the chimpanzee enclosure at London Zoo, and let the apes set the levels,” Gilbert writes.

Written by Alex Spanko

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  • I don’t think investors would appreciate a move back to the CMT… the 1-yr CMT has averaged 58 bps below the 1-yr LIBOR for the last 5 years.
    But if I had an interest rate Christmas list, it would include a US-based LIBOR substitute, published in the afternoon of each business day. This would eliminate the need to wait for the Intercontinental Exchange to post Friday figures on Monday. This could also open the door for new rates to become effective on non-holiday Mondays instead of Tuesdays. Not crossing my fingers, but it doesn’t hurt to ask.

    • On July 29th in a RMD article at
      I recommended that FHA delay any decision on going to CMT because of potential investor reaction.

      Who cares if borrowers can be secure that CMT can by the terms of the note replace LIBOR, IF investors find that unacceptable. Imagine the sell off in HMBS securities, if investors detect any potential downplay in their earnings due to the use of the CMT on existing HECMs. Yes, we need to be concerned about borrower reaction but if we have a less receptive investor environment to sell into, the damage could be horrific.

      It is about time we understand the easy solution for borrowers may be the worst solution for investors and our future with them.

      What is NRMLA doing about this? So far it seems it is more reactive than proactive.

  • It does not and did not surprise me that HUD planed for the disappearance of an index. Yes, it is a common sense provision to have in a note but sometimes, common sense does prevail.

    I also feel that we have a degree of time time to analyze various indexes to see what has the similarities of the LIBOR. I would advise that this action to analyze start immediately, if it has not started already!

    In any event, we should be OK and wind up with an index that will work just as well as LIBOR if not better in the long run!

    John A. Smaldone

      • Dan,

        We know that not only London banks but most major banks in the world have relied on LIBOR. What will their alternative be?

        Will Bloomberg step forward? Or perhaps there is another player waiting for the right movement. In the midst of a technological age, this kind of information should be readily available. It seems the only need are controls to avoid the improprieties of the LIBOR member era.

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