Recently, a revision to the Model Home Equity Conversion Mortgage (HECM) was made by the U.S. Department of Housing and Urban Development (HUD) to align with a potential rate index shift, which was described in a notice published in the Federal Register.
HUD sought comment from stakeholders on this move, and the National Reverse Mortgage Lenders Association (NRMLA) answered with a letter offering the industry’s perspective on next steps that should be taken if HUD implements a shift from the London Interbank Offered Rate (LIBOR) to its stated preference, the Secured Overnight Financing Rate (SOFR).
In the letter, NRMLA advised that lenders and servicers should be given 180 days to prepare for a transition from LIBOR to the SOFR index, and also encouraged the Federal Housing Administration (FHA) to continue implementing policies that align the HECM for Purchase (H4P) program with forward mortgages.
Federal Register publication
In the Notice published in the Federal Register on January 25, HUD stated that it was seeking approval from the Office of Management and Budget (OMB) for the collection of information regarding the model HECM Adjustable Rate Note, and documentation for the HECM for Purchase (H4P) program.
HUD stated in its notice that the model HECM Adjustable Rate Note has been revised to align with FHA’s transition from the LIBOR index to the SOFR index. This includes new definitions and replacement index language for future adjustable interest rate index transitions, but is also not limited to them.
The notice then asked for members of the public and any affected stakeholders to provide comment on four primary issues: whether the proposed information collection is necessary to the function of HUD; accuracy of HUD’s estimate for the burden that would be created through the information collection process; how the quality and/or utility of collected information could be enhanced; and how the information collection burden can be mitigated through the use of automated collection techniques or the permission of electronic submission of responses to the requests.
In its response letter, NRMLA describes that it solicited input from its membership, which includes a focus on enhancing the “quality, utility, and clarity of the information” that will be collected according to the Notice.
Speaking specifically to the interests of the reverse mortgage industry in the retirement of LIBOR, the letter further clarifies that the industry will not be spared the effects of a rate transition and should not be overlooked.
“Although not referenced in the Notice, the model HECM Adjustable Rate Mortgage also includes interest rate definitions and references to LIBOR,” the letter reads. “We assume any new definitions and replacement index language developed by FHA for the model HECM Adjustable Note will also be incorporated, as applicable, into the model HECM Adjustable Rate Mortgage.”
NRMLA also notes the particular level of complexity and difficulty involved with the LIBOR transition on the reverse mortgage side, citing the end-of-2021 time limit for mortgages using a LIBOR rate reference as well as the fact that the Government National Mortgage Association (GNMA, or “Ginnie Mae”) “has already restricted the eligibility of adjustable rate HECMs relying upon LIBOR for securitization into any HMBS pools on and after March 1, 2021,” the letter reads.
NRMLA also encourages that FHA publish the revised model HECM adjustable rate note as soon as possible, since the revision is otherwise unavailable for public view. The notice additionally suggests that FHA may have an intention to allow new construction of properties for H4P loans, a development NRMLA says it applauds.
“In that respect we also encourage FHA to further align its forward and reverse mortgage programs with respect to down payment funding sources and interested party contributions,” the letter reads.
SOFR transition for reverse mortgages
On the matter of the potential SOFR transition, it encompasses two efforts according to NRMLA: the origination of new adjustable rate HECMs tied to SOFR, and the transition of legacy adjustable rate LIBOR-indexed HECMs to SOFR.
“Each presents unique industry challenges impacting different processes and systems,” NRMLA explains. “For that reason, HECM originators and servicers respectfully request no less than 180 days advance notice before SOFR Index is required to either (i) originate new SOFR indexed adjustable rate HECMs, or (ii) to transition legacy LIBOR indexed adjustable rate HECMs to SOFR.”
While acknowledging that no final decisions have been made, the association continues to work with the Alternative Reference Rates Committee (ARRC) in determining the final replacement index for adjustable rate HECMs according to Steve Irwin, president of NRMLA.
“NRMLA continues to participate in the ARRC, and there is a reverse mortgage working group as part of the ARRC,” Irwin tells RMD. “There will be recommendations related to the LIBOR transition out of that working group, but that work is ongoing.”
In regards to the proposed 180-day timetable, that is the most viable amount of time considering all of the processes that would be necessary to deploy in an optimal and effective way, Irwin says.
“NRMLA feels that communications to borrowers need to start at least a year in advance,” Irwin tells RMD. “However, proper systems deployment, testing and readiness would take at least 180 days.”
SOFR as the reverse mortgage industry preference
While HUD has the final say on whatever the replacement reverse mortgage index will be, conversations with multiple individuals aware of the process behind such changes agree that the publication in the Federal Register is at least a good sign of some momentum taking place, but there are few if any indications about if or when a final decision in relation to the rate index will be handed down by the Department.
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 according to Michael McCully, partner at New View Advisors at the NRMLA Virtual Annual Meeting late last year.
“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 at the Annual Meeting in November, 2020. “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.”
NRMLA members can read the full comment letter at the association’s website (login required).