Described as an “autumn surprise” in the opening remarks of the National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting & Expo by association president Steve Irwin, the transition away from the London Interbank Offered Rate (LIBOR) index and toward the Constant Maturity Treasury (CMT) index is a pronounced disruption to the operations of the reverse mortgage industry.
Now that there has been a little bit of time since the initial announcement of the index transition was made, industry professionals are starting to forecast the full impact of this influential change on the industry at-large, and the Deputy Secretary of the U.S. Department of Housing and Urban Development (HUD) also weighed in with a statement on behalf of the government. This was the subject of a leading session at the NRMLA Virtual Annual Meeting held this week.
What the announcement means for reverse mortgages
The Federal Housing Administration (FHA) announced new restrictions on the eligibility of HECM-backed Securities (HMBS) for adjustable rate loans operating off of the LIBOR index at the end of September, effective for all HMBS issuances dated on or after January 1, 2021, nearly a year ahead of the planned sunset of the index. This means that the reverse mortgage industry cannot securitize any originations in pools tied to LIBOR, which led to a stark choice for the industry according to Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding (RMF).
“We cannot securitize any new loan originations in pools where the underlying loans are tied to LIBOR starting in December,” DeMarkey said. “That’s the easiest way I can explain it to you. Because we cannot securitize any new loans that are tied to LIBOR, and because FHA has not yet announced what the replacement indices are going to be for the LIBOR indices [tied to] the existing loans that we have all originated, we only had one choice, and we had to move fairly quickly. The choice that we had in front of us was to stop originating — which no one wants to do — [or] to only originate loans that are tied to CMT indices.”
CMT is, of course, a known element for reverse mortgage professionals who have been in the business for the past 12 years or more, since it was the index which was used for reverse mortgages prior to 2007-08. The entire industry displayed a great deal of nimbleness, DeMarkey said, because it pivoted quickly to start originating new loans tied to CMT.
The Federal Housing Administration (FHA) has not yet announced a timeline for a replacement indices for previously-originated reverse mortgages; those loans remain tied to LIBOR and will until the point that FHA makes a determination for a replacement and officially announces it.
What this means for current loans, the near future
The government sponsored enterprises (GSEs) have already announced a switch to the Secured Overnight Financing Rate (SOFR), so for those lenders engaged in the traditional mortgage space, the transition has already occurred. In terms of affecting more solid change on this front, it’s out of the hands of the reverse mortgage industry when it comes to FHA-sponsored HECM loans, DeMarkey said.
“So, what does it mean for the existing loans? There’s no change,” he explained. “Existing LIBOR loans will continue to be tied to the LIBOR indices, and HMBS issuers will continue to securitize those future advances from those existing LIBOR loans into new HMBS. Ginnie Mae was silent in their all points memorandum (APM) on a timeline for LIBOR tail issuance. And again, FHA remained silent up to this point in time on what their LIBOR transition plans are.”
When it comes to a decision concerning the new index for new and previously-originated loans, it has been worked on for the past few years adds Michael McCully, partner at New View Advisors.
“LIBOR, as you all know, is still scheduled to go away in 2021, no later than December 31, 2021,” McCully said. “The Alternative Reference Rates Committee (ARRC) that was put in charge of replacing that index was formed in 2014, six years ago. They made the recommendation and chose SOFR as the replacement index in 2017. So, the mortgage and lending industry as a whole have been working on this for quite a long time.”
When it comes to who will actually make the decision concerning a replacement index, it is entirely out of the hands of the reverse mortgage industry when it comes to HECM loans, McCully added.
“CMT is going to continue to be the new index until the FHA changes that, and that’s just how it is,” he said. “It is worth emphasizing that only FHA can make that change. Our expectation is still that FHA will announce the LIBOR replacements sometime in 2021.”
The official recommendation from NRMLA regarding the selection of a new index is to adopt SOFR, due to its wider use in the realm of financial services.
“We believe that moving to a niche index [like the CMT] for a niche product is the opposite direction [we want to be moving in] that we all are attempting to avoid,” McCully said. “We’re really working very hard to make our industry [the providers of] a more mainstream financial solution, and we don’t believe that remaining with CMT, for the long term, will have that intended effect.”
It’s the belief of the industry that SOFR will be far more broadly distributed and accepted as a global index, which would have a number of industry-specific benefits, McCully said.
“It will add to liquidity, meaning a number of institutional investors will be in the market buying and selling securities, which tends to add to value,” McCully said. “If all of the other mortgage products — certainly in the United States, if not the world — are using SOFR, the reverse mortgage industry really does not want to be the lone product that is still relying on [CMT, which is] an index that is from 30-plus years ago. For those reasons, it’s our hope and expectation that we, at the right time, move to SOFR.”
Briefly touching on this topic during the first day of the conference was Brian D. Montgomery, the deputy secretary of HUD. Montgomery found the dedicated conference session related to the rate transition interesting, and wanted to project the department’s readiness in handling it when the time comes.
“I just want to mention a little bit of what you discussed, because I know this is of great interest, that is of course the LIBOR transition,” Montgomery said. “That is a very important priority at the Department both for FHA and Ginnie Mae, though much of the work has been behind the scenes. I want to assure you that we are coordinating with the ARRC on our transition and plan to provide more guidance soon.”
HUD is primarily interested in making sure the transition happens with minimal problems, and described openness to working with industry players and stakeholders in order to ensure that is how it happens.
“We want to make sure that there are no issues related to that transition,” he said. “No orphan loans, for example, when securitizing, and that the market and products are not interrupted. We are willing to work with you on a case-by-case basis to ensure that’s the case, and [seek] to make sure that everything continues to function going forward.”