Today, the Federal Housing Administration published Mortgagee Letter (ML) 2021-08, which paves the way for the removal of the London Interbank Offered Rate (LIBOR) index and replaces it with the Secured Overnight Financing Rate (SOFR) index.
Existing LIBOR-based HECMs closed prior to May 3, 2021, remain unaffected by this ML. FHA will issue policy guidance regarding existing LIBOR contracts at a future date.
ML 2021-08 highlights include:
- The ML revises, and where it conflicts, supersedes the requirements in 24 CFR § 206.3 and 24 CFR § 206.21, and MLs 2007-13 and 2016-16;
- Mortgagees may no longer originate adjustable interest rate HECMs using the LIBOR index but may use the CMT or SOFR indexes;
- For all adjustable interest rate HECMs, mortgagees must use the 10-Year CMT to establish the expected average mortgage interest rate;
- For annual adjustable interest rate HECMs using the SOFR index, mortgagees must use the 30-day average SOFR, as published by the Federal Reserve Bank of New York at https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind;
- HUD established zero as the minimum for the index value used to determine the Note rate for all HECMs to prevent against below-zero interest rates in a negative interest rate environment; and
- HUD provided model loan documents to include the requirements defined in this ML, including the fallback language for future adjustable interest rate index transition events. The revised model loan documents will be available on the Single Family Mortgages Model Documents web page.
NRMLA will provide further updates once we have the opportunity to analyze ML 2021-08 in greater detail.