The reverse mortgage industry’s efforts to fully retire the use of the London Interbank Offered Rate (LIBOR) index for adjustable-rate Home Equity Conversion Mortgage (HECM) loans is proceeding with the industry’s input, particularly through the efforts of the National Reverse Mortgage Lenders Association (NRMLA) and certain industry players in conversations with the U.S. Department of Housing and Urban Development (HUD) and the Government National Mortgage Association (GNMA, or “Ginnie Mae”).
This is according to a panel that took place at the NRMLA Virtual Policy Conference last month, featuring an update on the industry’s efforts in adopting a new index – preferably the Secured Overnight Financing Rate (SOFR) – involving New View Advisors Partner Michael McCully and Reverse Mortgage Funding (RMF) Strategic Business Development Leader Joe DeMarkey.
Mortgagee Letter impact
In March, HUD and the Federal Housing Administration (FHA) published Mortgagee Letter 2021-08, which officially announced that the HECM program is moving on from the LIBOR index for adjustable-rate HECMs, and will instead adopt the SOFR. The letter constituted long-awaited guidance from the federal government, and “removes approval for use of the LIBOR index for adjustable interest rate HECMs,” approving the industry’s preferred index of SOFR while providing a timeline for how and when the changes will be implemented.
In general, the ML was well-received by industry stakeholders and the trade association, which submitted an additional letter to GNMA over how some of the provisions in the ML could be further improved, according to McCully.
“[The ML] does allow for the commingling of indices, especially to calculate the expected reserve. This was a challenge the industry had a year ago that was resolved with this Mortgagee Letter, so we’re very pleased to see that,” McCully explained. “And it sets as a floor 0 for the index itself. There were a handful of technical improvements that we saw room for, and NRMLA submitted our comment letter collecting the industry’s observations and thoughts around how we could improve on that letter.”
Still, in terms of the impact and reception of the ML itself within the reverse mortgage industry, it was very well-received, McCully explained.
“The Mortgagee Letter was very well-received, and we look forward to hearing back on some of our comments,” he said. “In particular, using SOFR not only for the annual adjustable HECM, but also for the monthly adjustable HECM.”
LIBOR’s continued use
The LIBOR index, however, does continue to be used for tail issuance for previously-originated HECM loans on existing books of business, and the fact that this is the case remains a critical issue for the reverse mortgage industry, McCully says.
“The impact of a sudden change in index on those existing books of business would be potentially damaging to the industry, and we’re very careful about monitoring the progress of continuing to be able to use LIBOR for that existing book of business,” McCully explained. “And with that, in early March, the U.K.’s Financial Conduct Authority announced the formal cessation date of LIBOR has been extended out to June 30, 2023, so a little more than two years from now.”
That new cessation date does help to give the American reverse mortgage industry some time to facilitate a smooth transition away from LIBOR for existing books of business, McCully says, but the importance of the topic does remain for industry stakeholders and the trade association.
“This does remain a very important topic for us at NRMLA and for the industry, and we are in regular contact with the FHA and Ginnie Mae for this topic,” he said.
Adjustment to CMT in the interim
Last fall, an abrupt announcement by GNMA detailed new restrictions on the eligibility of HECM-backed Securities (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 then-planned sunset of the index.
However, the January 1 date was revised to March 1, 2021 shortly thereafter, a new timeline reportedly reached in consultation with the reverse mortgage industry. The reverse mortgage industry transitioned to the previously-used Constant Maturity Treasury (CMT) index for the interim period, an adjustment which was made with surprising ease, according to McCully.
“We’ve been pleased that the capital markets have received CMT-based HMBS better than we all expected,” he said. “It’s important for everyone to know that while long-term we expect SOFR to be the index, it’s not guaranteed. But, the SOFR market is still brand new and very immature. It takes time to develop sufficient liquidity to generate the indices that we all hope to have one day, and we’re just in the ‘first inning’ of that timeline.”
McCully and others do think that over time, forward term indices meaning those beyond just a one-month index will be available, meaning periods of three, six and possibly 12-months. At this point, it’s too soon to know for sure, he says. Even with that, there is another important consideration.
“The other important point here is that Ginnie Mae has not yet changed its rules for allowing SOFR,” McCully says. “That’s an important factor we need to consider. And even with this Mortgagee Letter that was published a couple of months ago by HUD, there are no timelines specifically mentioned in that Mortgagee Letter. So, it’s up to us as an industry and HUD working together to figure out when these indices are ready, when they’re available, when they’re broadly distributed, and when the market is ready to see SOFR as an index that we transition to SOFR away from LIBOR officially.”
Picking up further on the baseball “inning” analogy that McCully used, RMF’s Joe DeMarkey aimed to emphasize the amount of work that remains to be done as the industry tries to facilitate a full transition away from LIBOR, including for proprietary reverse mortgage products.
“Obviously, much more work has to be done: some within our control, some outside of our control, such as the development of a forward curve with plenty of liquidity where an administrator that’s been hired by the Federal Reserve will be able to publish those forward rates that might be more comparable to what the industry has been accustomed to,” DeMarkey said. “[Something like] a one-month or one-year LIBOR.”
Also touched upon was the manner in which proprietary reverse mortgages are currently entwined with the outgoing index.
“For proprietary products, I think most of them are using three-month LIBOR today,” DeMarkey said. “And, we’re hoping that the equivalent of a SOFR index with that duration would get developed in the not-too-distant future here. So, a lot more to happen.”