Borrowers of adjustable-rate forward and reverse mortgages as well as home equity lines of credit (HELOCs) are being advised to stay on the lookout for a “strange” notice they’re likely to receive in the mail, with a subject concerning the impending transition away from the London Interbank Offered Rate (LIBOR) index. This is according to a new piece published by Money.com.
The shift away from LIBOR will mean a change in the way the rate is determined each time the adjustable-rate mortgage (ARM) borrower’s loan resets. Since most borrowers are unaware of the specifics concerning the way in which a mortgage rate is calculated, the communication may be confusing or alarming to some borrowers, according to the column.
Additionally, most borrowers should see little impact on the change to a replacement index, which is likely to be the Secured Overnight Financing Rate (SOFR) for both forward and reverse ARMs, according to recent industry indications.
“Existing ARM borrowers will likely see very little impact,” says Nicholas Corpuz, senior director of compliance at mortgage servicing technology company Brace Software to Money.com.
Since SOFR is based on billions of transactions, it should be more difficult to influence when compared to the issues that led to the discontinuation of LIBOR’s use, according to Thomas Showalter, founder and CEO at mortgage underwriting platform Candor Technology to Money.com, which should mean that larger rate changes will become less frequent, he says.
“Small changes might be more frequent, but borrowers won’t be in for sticker shock when their loans switch benchmarks,” Showalter tells the outlet. “Since the new SOFR is transaction-based, it is likely that ARM-related changes will be less abrupt and more stable over time. For SOFR to change a great deal, billions of dollars in transactions would have to clear at the new rates in order for a modest change in rates.”
Earlier this year, the Federal Housing Administration (FHA) officially announced that the Home Equity Conversion Mortgage (HECM) program is moving on from the LIBOR index for adjustable-rate HECMs, and will instead adopt SOFR. This was made official with the publication of Mortgagee Letter (ML) 2021-08 in March.
However, existing LIBOR-based HECM loans closed prior to May 3, 2021 “remain unaffected by th[e] ML,” and FHA plans to “issue policy regarding existing LIBOR contracts at a future date.”
The National Reverse Mortgage Lenders Association (NRMLA) praised the move at the time, according to Steve Irwin, president of the association, in a statement co-signed by leading reverse mortgage lenders American Advisors Group (AAG) and Finance of America Reverse (FAR).
“Through its appropriate use of the authority granted via the Reverse Mortgage Stabilization Act, HUD has promulgated policy that will strengthen HECM’s place in a more broadly accepted and mainstream mortgage market,” Irwin told RMD in March. “This policy will also continue to bolster the safety and soundness of the HECM program, which is always a key consideration in the development of HECM policies.”
Read the column at Money.com about the shift away from LIBOR.