HUD seeks comment on LIBOR transition for reverse and term mortgages
The U.S. Department of Housing and Urban Development (HUD) this week posted a request for public comment in the Federal Register regarding the ultimate transition from the besieged London Interbank Offered Rate (LIBOR) index to variable rate mortgages ( ARM). The request for comment concerns mortgagees offering both term ARMs as well as variable rate home equity conversion mortgages (HECMs), according to the document.
Given the likelihood of operational difficulties for mortgagees making such an adjustment, questions about implementing a new index and legacy support for loans that have previously used LIBOR as a basis have encouraged the HUD to gather feedback from all sectors of term and reverse mortgages. The hope is that this action will make the transition as smooth as possible, according to the document.
LIBOR adjustment for reverse mortgages
As it stands, a provision in the National Housing Act authorizes the FHA to insure variable rate HECMs and impose additional eligibility requirements on HECMs, which could include requirements for HECM ARMs.
Earlier this year, in Mortgagee Letter (ML) 2021-08, HUD officially announced that the HECM program would move away from the LIBOR index for floating rate HECMs and instead adopt the Secured Overnight Financing Rate (SOFR). . This change was a long-awaited direction from the federal government, endorsing the industry’s preferred index while providing a timeline for how and when HUD would implement the changes.
The ML also announced the new note template language, included in the revised template loan documents for the first and second HECM Adjustable Interest Rate Notes, and incorporating the changes described in the ML.
“The HUD has released revised mortgage document templates with ‘fallback’ language intended to deal with future interest rate index transition events,” HUD said in the registry this week. “This language was modeled on the fallback language published by the Alternative Reference Rates Committee (ARRC) for variable rate residential mortgages.”
With respect to the rule changes currently being debated by the Ministry, the removal of LIBOR and the addition of periodic adjustments based on other indices is one such potential measure.
“HUD intends to publish a regulatory proposal to remove LIBOR as an available interest rate index and to provide a new available index for periodic adjustments of new term policyholders and HECM ARM, to recommend a comparable replacement index for existing term mortgages and to implement a Secretary-prescribed Replacement Index for existing HECMs, ”HUD said in the registry document. “When LIBOR ceases, a mortgagee could replace LIBOR with the HUD-approved Spread Adjusted Index. “
Persistent issues requiring comment
While the original ML describing the LIBOR shutdown for HECM ARMs contains a lot of information and provisions permitted by law, the document indicates that there are still outstanding issues on which the ministry is seeking stakeholder views.
“Although HUD has already made some regulatory changes to the original HECM ARM requirements in the 2021-08 Mortgage Letter in accordance with the authority granted in the Reverse Mortgage Stabilization Act 2013 […], HUD will codify these requirements in developing the rules, ”the document said. “Additionally, HUD did not address the LIBOR transition for legacy HECM contracts in [ML] 2021-08.
According to the document, a lingering question is whether the HUD should take different or uniform approaches between term and reverse mortgage programs.
“HUD is seeking public input on the best method to make such a transition for legacy loans and new builds,” the registry document read. “For each of the questions [HUD poses] and with respect to any other matter, HUD is specifically interested in public comment on whether and how HUD should take a different course of action for HECM and term mortgages.
One specific question that HUD seeks direct comment on is: “What issues do service mortgagees anticipate regarding growth in the HECM primary limit resulting from a change in index?” “
Additionally, the current rules regarding the use of LIBOR as an interest rate adjustment index for ARMs in HUD term and reverse mortgage insurance programs “are becoming obsolete,” the ministry said, as the LIBOR is being phased out.
“HUD must […] modify by regulation its authorized interest rate indices for HECM ARM products and allow lenders to switch from LIBOR to a replacement index for existing HECM ARM products, ”the document said. “Therefore, this rule is necessary to prevent the HUD’s rules on ARMs from becoming obsolete as well as to avoid the risk of financial harm to ARM lenders, borrowers and the broader ARM market.”
Last July, the ARRC announced that it is now officially recommending forward looking SOFR forward rates following the completion of a critical change in broker-to-broker trading agreements this month. While this in and of itself does not have a direct effect on the trajectory of the reverse mortgage industry, it could be a valuable step forward in the eventual adoption of SOFR forward rates for the future. ‘business.
Once contacted to comment on the reverse mortgage industry’s engagement on these issues during the HUD comment period, a solid discussion and plenty of data supporting the industry’s position will be submitted according to Steve Irwin, President. of the National Reverse Mortgage Lenders Association (NRMLA).
“Thanks to the work of the committee of issuers of securities backed by the NRMLA HECM (HMBS) and the participation of the NRMLA in the Alternative Reference Rate Committee (ARRC), we anticipate this notice of proposed regulation concerning the LIBOR transition”, Irwin told RMD. in an email. “The HMBS Issuer Committee will have a trained project team and we plan to provide industry feedback on time.”
This deadline is currently set for December 6, 2021. Read the document in the Federal Register.