January 2021 LIBOR Restriction Spurs Planning from Reverse Mortgage Industry

The shortened timetable for the restriction of the London Interbank Offered Rate (LIBOR) index to serve as the basis for adjustable-rate reverse mortgages has caused the reverse mortgage industry to take action, as the reverse mortgage trade association and capital markets experts have engaged in dialogue with government officials with the aim of adjusting the implementation timetable.

The National Reverse Mortgage Lenders Association (NRMLA) announced that it had submitted comments to the Government National Mortgage Association (GNMA, or “Ginnie Mae”) regarding the recently-announced new timeline for the LIBOR restriction on the reverse mortgage industry, while capital markets experts are working from an understanding of what the likely replacement index will be considering all the involved factors at play.

Meanwhile, Ginnie Mae plans on closely working with affected stakeholders, including those in the reverse mortgage industry, according to a spokesperson.

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NRMLA submits comments

After Ginnie Mae announced that LIBOR-based loan pools in Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) would be restricted starting on January 1, 2021, NRMLA submitted comments last week that were designed in consultation with members of the association’s HMBS Issuer committee, the association announced to its membership.

“It is our hope that we can work with GNMA to find a path towards adjusting the implementation timelines announced in All Participant Memorandum 20-12 and mitigate the severe impacts to HECM borrower applicants that would be created by this policy announcement,” the association said in an update to its members. “NRMLA will keep members updated as we work through this issue.”

The announcement of the new timetable required quick action on the part of the association, as indicated by its president’s comments to RMD previously.

“NRMLA and its issuer members are a bit surprised by today’s announcement by GNMA,” NRMLA President Steve Irwin told RMD in an email on September 21. “We will continue our efforts with the Alternative Reference Rates Committee (ARRC) and ICE to try and transition the HECM market to a more broadly accepted index.”

Short-term effects, CMT vs. SOFR

Now that the timetable for LIBOR-indexed HECMs has been shortened with the announcement by Ginnie Mae, closing as many LIBOR-based originations as possible in the interim will take place according to Michael McCully, partner at New View Advisors.

“There will likely be a two month surge of LIBOR-based originations, as lenders race to beat the deadline,” said McCully in an email to RMD. “That is, fund their last LIBOR loans in time to convert them to HMBS before December.”

While the industry preference is the Secured Overnight Financing Rate (SOFR), the Constant Maturity Treasury (CMT) rate is the index January 1, McCully explains.

“Adjustable rate HECM and HMBS production will shift to the CMT index,” he tells RMD. “How the industry fares from CMT-based HMBS remains to be seen but execution may fall based on lower liquidity and other capital markets dynamics.”

While short-term the industry will see adoption of CMT, shifting to SOFR longer-term remains a possibility, according to McCully.

“Long term, HUD may still adopt SOFR as the index for adjustable rate HECMs, assuming it becomes the established replacement index for LIBOR,” he explains.

GNMA response

When asked about the implications for the reverse mortgage industry and about what rate can be adopted before and after the January 1 suspension date for LIBOR-backed HMBS, a spokesperson for GNMA related that discussions are ongoing but that the entity will ensure the availability of HECMs for borrowers that want them.

“Ginnie Mae will continue to work closely with all market participants to ensure that capital continues to be there for consumers who want a government-backed reverse mortgage,” a GNMA spokesperson told RMD in an email.

Previously, Ginnie Mae publicly related that an April 2019 Multiclass Securities transaction included several classes of securities indexed to a monthly calculated SOFR, the first Ginnie Mae transaction to include SOFR-indexed securities. This helped to lay the groundwork for future transactions that can use SOFR as an index, while also providing for selection of replacement indices if SOFR should for some reason become unavailable.

Recent history

In a memorandum released at the end of September, Ginnie Mae announced new restrictions on the eligibility of HMBS for adjustable rate loans operating off of the LIBOR index effective for all HMBS issuances dated on or after January 1, 2021, nearly a year ahead of the planned sunset of the index.

After international investigations determined that LIBOR was vulnerable to widespread manipulation efforts identified between 2003 and 2012, global regulators started more actively advising financial institutions to move away from the LIBOR standard, preferably by 2021. In 2014, the Federal Reserve Bank of New York first convened ARRC to identify best practices for alternative rates, and to develop an implementation plan.

In mid-2019, Ginnie Mae SVP in the Office of the President Michael Drayne told reverse mortgage industry participants that the timing of determining a new rate index was complicated by the inherent complexity of the issue.

“We’re looking at this, HUD is looking at this, and we’re all participating in the industry working group convened by the Federal Reserve ARRC,” Drayne told attendees at the NRMLA Eastern Regional Meeting in May 2019. “The amount of time we have to figure everything out is less reassuring the more you look at how complicated this problem is. We at Ginnie Mae have indirect exposure to this issue. In the end, on the government side, it’s up to the Secretary of Housing to determine what the main rate is going to be.”

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