The reverse mortgage industry has been awaiting news regarding a rate index shift away from the London Interbank Offered Rate (LIBOR) for some time, with its stated preference for a replacement index being the Secured Overnight Financing Rate (SOFR) We recently saw new movement on this topic with the publication of a proposed rule in the Federal Register, which is currently being reviewed by stakeholders and reverse mortgage industry players.
The reverse mortgage industry has changed quite a lot over the past two years, so for the benefit of new industry players to contextualize what this move could mean for the business in the context of other developments, RMD presents this look back at what led to the publication of the new proposed rule.
Susceptibility of LIBOR
After international investigations determined that the LIBOR index was vulnerable to widespread manipulation efforts identified to have taken place between 2003 and 2012, global regulators started more actively advising financial institutions to move away from the LIBOR standard, preferably by 2021. In 2014, the Federal Reserve Bank of New York first convened the Alternative Reference Rates Committee (ARRC) to identify best practices for alternative rates, and to develop an implementation plan.
In mid-2019, Government National Mortgage Association (GNMA, or “Ginnie Mae”) SVP in the Office of the President Michael Drayne told reverse mortgage industry participants that the timing of determining a new rate index was complicated by the inherent complexity of the issue.
“We’re looking at this, HUD is looking at this, and we’re all participating in the industry working group convened by the Federal Reserve ARRC,” Drayne told attendees at the NRMLA Eastern Regional Meeting in May 2019. “The amount of time we have to figure everything out is less reassuring the more you look at how complicated this problem is. We at Ginnie Mae have indirect exposure to this issue. In the end, on the government side, it’s up to the Secretary of Housing to determine what the main rate is going to be.”
From these discussions as related to Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS), two alternative rates emerged as potential replacements: SOFR and the Constant Maturity Treasury (CMT) index, however the reverse mortgage industry much-preferred SOFR due to its more widespread use in the realm of the financial services industry.
Restriction of LIBOR-based HMBS
In September 2020, Ginnie Mae announced new restrictions on the eligibility of 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. Previously, action related to a new rate index for reverse mortgages was tied to the December, 2021 sunset of the LIBOR index, but the September 2020 announcement caught many by surprise, including issuer members at the National Reverse Mortgage Lenders Association (NRMLA).
The ultimate decision regarding a new index for the reverse mortgage program rested with the Federal Housing Administration (FHA), however, and the industry waited for several months to hear about a decision on the matter. That decision arrived in March 2021, when Mortgagee Letter (ML) 2021-08 officially announced that the HECM program would be moving on from the LIBOR index for adjustable-rate HECMs, and would in fact adopt SOFR.
“Mortgagees may no longer originate adjustable interest rate HECMs using the LIBOR index but may use the CMT or SOFR indexes,” the ML said. “For all adjustable interest rate HECMs, the mortgagee must use the 10-Year CMT to establish the expected average mortgage interest rate. For annual adjustable interest rate HECMs using the SOFR index, the mortgagee must use the 30-day average SOFR, as published by the Federal Reserve Bank of New York.”
NRMLA praised the decision handed down by HUD, saying it will help to secure the HECM program for some time to come.
“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,” NRMLA President Steve Irwin told RMD at the time. “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.”
The proposed rule
This has all led to the newly-proposed rule published last week in the Federal Register.
“HUD proposes three changes,” the proposed rule reads. “First, HUD proposes to transition from LIBOR to a spread-adjusted SOFR index for existing forward and HECM ARMs, and to replace LIBOR with SOFR as a Secretary-approved index for new ARMs. Second, HUD proposes to clarify its regulations regarding the Monthly Adjustable Interest Rate HECMs [in existing regulations]. Third, HUD proposes to establish a five percentage point lifetime cap on the adjustment of the HECM monthly ARM interest rate.”
Public comments on the newly-proposed rule will be permitted through November 18, 2022. The reverse mortgage industry is also preparing to convene for the first NRMLA Annual Meeting since 2019 in Atlanta, where this is sure to be a topic of conversation among guests and attendees to one degree or another.