The Federal Housing Finance Agency announced the process by which Fannie Mae and Freddie Mac (GSEs) plan to transition from the use of LIBOR (London Interbank Offered Rate) to SOFR (Secured Overnight Financing Rate) as the standard index rate for adjustable rate mortgage (ARM) loan products.
The Alternative Reference Rates Committee (ARRC) is a group of private-market participants convened by the Federal Reserve Board and the New York Fed to make sure that this transition is successful. The AARC is aware that many contracts currently referencing LIBOR do not contemplate how the interest rate will be calculated in the event LIBOR is no longer appropriate. To address this issue, the ARRC has released fallback contract language for closed-end, residential ARMs that provides direction on the selection of a replacement index when an index is no longer available.
The GSEs recently published updated ARM notes and riders that incorporate the ARRC fallback language. Lenders are encouraged to use the updated documents immediately, but the fallback language will be required in all notes closing on or after June 1, 2020.
The GSEs have further indicated that they will only accept ARMs based on the LIBOR index if they have application dates on or before September 30, 2020. Additionally, all LIBOR ARMs must be purchased as whole loans on or before December 31, 2020 or be in MBS pools with issue dates on or before December 1, 2020.
The GSEs have stated that they anticipate accepting SOFR ARMs during the second half of 2020 and will provide additional information in the coming months.