As the timeline for the London Interbank Offered Rate (LIBOR) index’s service as the basis for adjustable-rate reverse mortgages has been considerably shortened after a decision last month by the Government National Mortgage Association (GNMA, or “Ginnie Mae”), the reverse mortgage industry has found itself needing to quickly adapt to the adoption of a new rate index by the beginning of 2021.
Largely, lenders and servicers appear to be taking the move in stride, and while the shift may prove to be somewhat disruptive, industry leaders are confident that they can accommodate the move to the Constant Maturity Treasury (CMT) index within the accelerated timetable.
Among the major lenders, both Finance of America Reverse (FAR) and Reverse Mortgage Funding (RMF) have shared that their companies stand ready to accommodate the changes that have stemmed from Ginnie Mae’s shortened timeline.
“RMF will be ready for the changes,” said RMF CMO Jean Noble in an email to RMD. “We are in the final planning stages now.”
In terms of FAR’s readiness, the lender says that it has expected the cessation of LIBOR’s use for a while now, and has been actively taking precautions in preparation for this moment. This is according to Jonathan Scarpati, VP of wholesale lending at FAR.
“FAR has been actively preparing for this change by speaking to our end investors, creating new rate sheets, updating our technology, and taking all other necessary steps,” Scarpati told RMD in an email. “We’ll be ready for the shift to the CMT rate and this is good news for some. If you are selling the same margins you have been offering on LIBOR then the expected rate or the principal limit factor for the borrower will be very similar. Additionally, the reverse mortgage industry previously used the CMT rate, so this is nothing new for the industry veterans out there.”
FAR is also taking steps to ensure that loans which cannot be closed prior to the LIBOR cutoff can be re-acclimated to CMT without having to start such a loan from the beginning.
“At this point, we’re focused on ensuring our originators can begin to disclose the CMT rate index and are ready to transition to the CMT rate,” Scarpati said. “Notably, for any loans that do not close before the LIBOR cutoff, FAR will allow those loans to be re-disclosed to CMT so it will not require starting the process over from scratch.”
Representatives from other major lenders declined to comment on their own postures for this story, with some instead deferring to the stated positions of the National Reverse Mortgage Lenders Association (NRMLA). NRMLA previously expressed surprise at the shortened timeline and said it hopes to work with HUD and Ginnie Mae to adjust the implementation timelines of Ginnie Mae’s memo, according to an announcement to the association’s membership issued late last week.
Reverse mortgage loan origination system (LOS) providers are also preparing for the shift to CMT by January 1, and in the cases of both Bay Docs and ReverseVision, both companies had previously supported CMT and are preparing to do so once again.
For Novato, Calif.-based Bay Docs – which oversees the “Reverse Express” LOS – the company has reactivated the CMT index within their system, which the company says can provide “an avenue for originators to generate required disclosure packages using either the 1-year CMT or 1-month CMT indices,” according to a statement. Bay Docs partners can also generate packages through the system’s integrated document engine.
“When the industry made the switch to the LIBOR index we simply deactivated the CMT option which allows us to reactivate easily and quickly now that the CMT is back in play,” said Bay Docs President and CEO Megen Lawler in a statement provided to RMD. “Updates include changes to the ‘Important Terms’ disclosure, all ‘Security Instruments’ and several other disclosures which include language pertaining to the index.”
San Diego, Calif.-based software provider ReverseVision is also similarly prepared to make the jump when the day comes, also stemming from previous support for CMT descended from the years prior to the industry’s adoption of the LIBOR index.
“ReverseVision has supported the CMT rates for years,” said Joe Langner, president of ReverseVision in an email to RMD. “Because of the recent renewed interest CMT rates, we have taken proactive measures to ensure that our customers are able use either the LIBOR or the CMT index on all relevant documents.”
ReverseVision is also taking additional steps to incorporate other indices should a shift to another option take place later in 2021, Langner added.
“Additionally, we have already instituted measures that will allow us to quickly adapt document language and reference points to future index changes,” he said. “In May, our core products were enhanced in anticipation of the likely migration to the Secure Overnight Financing Rate (SOFR) index.”
LOS QuantumReverse also supports both the LIBOR and CMT indices according to its founder and CEO, Thomas Martignoni.
“QuantumReverse’s robot updates LIBOR and CMT rates weekly as soon as they become available,” Martignoni tells RMD in an email. “Documents seamlessly handle LIBOR and CMT and QuantumReverse allows loans to be switched from LIBOR to CMT and back, automatically recalculating the proceeds. Also QuantumReverse’s API already supports both indices.”
On the servicing side, Compu-Link Corporation (Celink) is similarly supportive of efforts spearheaded by NRMLA to dialogue with Ginnie Mae over the form the index transition takes, according to Celink president and COO Ryan LaRose.
“As it relates to the shortened timetable to LIBOR, we are very supportive of NRMLA’s efforts to engage Ginnie Mae to ensure a smooth transition away from the LIBOR index,” LaRose told RMD in an email. “NRMLA’s Capital Markets Committee [has] been spearheading this issue on behalf of the industry.”
Still, Celink is fully-prepared to resume usage of the CMT index since it has a legacy of operating off of it, and still maintains a portfolio that uses CMT as opposed to LIBOR, LaRose says.
“Celink currently subservices a large number of older HECM loans that were based on the CMT index,” LaRose said. “As a result, our servicing platform is already capable of handling loans with a CMT index moving forward. At the present time, we are working closely with our master servicer clients to prepare and ensure that we are aligned with their plans to comply with the requirements around the transition to CMT.”
Reverse Mortgage Solutions (RMS) also expressed readiness for the change when reached by RMD.
“We no longer originate so this issue just affects our current servicing portfolio of LIBOR-based loans,” said Leslie Flynne, SVP of loan servicing at RMS. “We will be ready.”
On September 21, Ginnie Mae announced new restrictions on the eligibility of Home Equity Conversion Mortgage (HECM)-backed Securities (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.
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 on October 5. “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 explained.
“Adjustable rate HECM and HMBS production will shift to the CMT index,” he told RMD earlier this week. “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.”