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As LIBOR Sunset Nears, Reverse Mortgage Industry Prepares for What’s Next

The reverse mortgage industry, in consultation with federal agencies and industry stakeholders, is taking active steps to prepare for the sunset of the London Interbank Offered Rate (LIBOR) index, which is scheduled to end in 2021. Work between capital markets experts, the Department of Housing and Urban Development (HUD), the Government National Mortgage Association (GNMA, or “Ginnie Mae”) and the National Reverse Mortgage Lenders Association (NRMLA) is progressing and the transition should be unaffected by factors like he COVID-19 pandemic.

This is according to Michael McCully, partner at New View Advisors during a presentation at NRMLA’s Summer Virtual Meeting last month, as well as in a recent interview with RMD. NRMLA has also taken the additional step of submitting a letter to the Consumer Financial Protection Bureau (CFPB) regarding the reverse mortgage industry’s transition away from the LIBOR index.

Industry prepares to educate officials

In order to adequately inform HUD of the specific impacts of the LIBOR transition on the reverse mortgage industry, NRMLA and its HMBS Issuer Committee have been working with other capital markets subject experts to develop educational materials that can be delivered to HUD, McCully says.

“We are essentially partnering with Ginnie Mae for those materials,” McCully says. “Ginnie Mae is de facto HUD’s in-house capital markets experts. HUD doesn’t have all of the capital markets acumen that Ginnie Mae would have, and you can’t blame them because there’s a lot to learn. And so, they rely on Ginnie Mae for objective observations and perspective.”

NRMLA and Ginnie Mae’s collaboration on these educational materials is important to the final transition away from LIBOR, since authority related to the designation of a new index rests primarily with HUD, McCully explains.

“HUD has ‘the pen’ as it pertains to replacing LIBOR,” he says. “They have the unique and sole obligation and responsibility for switching that index away from LIBOR. And so, to the extent the industry can provide input to HUD on what makes the most sense from the perspectives of borrowers, HMBS issuers, lenders and all of the affiliated companies, we feel that’s our obligation to present that information to them.”

Primary concern of the transition

When aiming to relate what the primary reverse mortgage industry concern is in terms of which index is ultimately chosen to replace LIBOR, it largely comes down to uniformity with other financial services, McCully explains.

“Our principal concern is that we want our industry to adopt the same widely recognized liquid, mainstream global index or set of indices that the rest of the mortgage industry [will use], McCully explains. “We want to be lockstep with the rest of the financial markets, and do not want to end up having a different index than the rest of the financial markets and financial world uses. That’s our overriding objective.”

On a call that took place with the organization charged with developing the replacement indices — the Alternative Reference Rates Committee (ARRC) — it was encouraging to hear how in-tune that organization appears to be with the interests of the reverse mortgage industry, McCully says.

“That was a very good call. We are extremely encouraged by their level of engagement and their attention to topics that are important to the reverse mortgage industry specifically,” he says. “First and foremost, they are in direct communication with HUD. They have established a dialogue directly with HUD, and that’s very encouraging.”

It was also learned on the call that term versions of the likely replacement index, the Secured Overnight Financing Rate (SOFR), are coming, McCully says.

“One month, three months and six months [variations of SOFR] are likely well underway,” he says. “One year [is] very doable. What ARRC will be doing next is distributing a Request for Proposal (RFP) to award the administrative role for distributing those indices. That’s expected in the third quarter.”

Once the RFP is awarded, there will be a series of SOFR-based indices that reflect different maturity lengths, McCully says. Additional work for adapting SOFR to more than a month index will be required 

Time enough for the transition

While the time has certainly gone by quickly, McCully is confident that there is enough time left for the transition away from LIBOR to take place on-time. This is according to an interview with McCully conducted after his presentation.

“HUD knows replacing LIBOR with a new index before 2022 is required and their staff have been working on the transition for some time,” McCully tells RMD. “HUD needs to have the new index in place by December 31, 2021, but it can be sooner if industry software, servicing systems, contracts, etc., are ready.”

Although he previously characterized SOFR as the “likely” replacement index, that’s not to say that the concerns the reverse mortgage industry maintains about the CMT index being chosen are gone. It’s still a possibility, according to McCully.

“Replacing LIBOR with CMT remains a concern for the industry. It is too soon to know what HECM’s replacement index for LIBOR will be,” he says.

That being said, Ginnie Mae and ARRC are still very attuned to what concerns remain for the reverse mortgage industry, he adds.

“Ginnie Mae and ARRC understand first that the industry requires a publicly available, widely distributed index,” he says. “[They also understand that] the new reference index must address multiple maturities.”

While 2021 does seem to be right around the corner, McCully is confident that a replacement index will be chosen in time for the sunset of LIBOR, he says.

“Nearly 17 months is sufficient time to transition away from LIBOR to its successful replacement,” he says.

NRMLA submits letter to CFPB regarding LIBOR transition

In June, the CFPB released guidance related to the discontinuation of LIBOR in an effort to better facilitate creditors’ transition away from using it as an index for variable-rate consumer credit products.

While NRMLA actively applauds the CFPB in addressing how the LIBOR sunset will impact lenders and consumers, it must be doing more to coordinate with Ginnie Mae and HUD in order to ensure that any replacement index complies with changes being considered for Regulation Z, which requires lenders to provide monthly billing statements to borrowers and financial institutions and to notify borrowers of changes in interest rates in adjustable-rate loans.

This is according to a letter submitted by NRMLA to the CFPB this month.

“If HUD decides to switch the HECM index to SOFR as of January 1, 2021, then lenders would have to comply with this in order to make FHA-insured HECM loans,” the letter reads in part. “However, as the proposed rule is drafted, it is not clear to us how such a required change prior to March 15, 2021 would work. Close coordination with HUD and Ginnie Mae in finalizing the proposed rule will, in our view, reduce the risk of such confusion.”

NRMLA also urges the CFPB to coordinate with ARRC concerning the creation of language related to home equity line of credit documents on both the forward and reverse sides, while also encouraging the Bureau to engage with consumers concerning the transition and how it may affect them.

“In NRMLA’s view, having the CFPB speak authoritatively on this issue to consumers will greatly reduce the potential for confusion, which may occur if the CFPB leaves such education up to a variety of lenders,” the letter reads.

Find the letter on NRMLA’s website (association membership required).