As Sunset LIBOR Approaches, Reverse Mortgage Industry Gears Up For The Sequel

The reverse mortgage industry, in consultation with federal agencies and industry stakeholders, is taking active steps to prepare for the extinction of the London Interbank Offered Rate (LIBOR) index, which is expected to end in 2021. Work between capital markets experts, the Department of Housing and Urban Development (HUD), the Government National Mortgage Association (GNMA, or “Ginnie Mae”) and the National Reverse Mortgage Lenders Association (NRMLA) is progressing and the transition is only expected. not be affected by factors like the COVID-19 pandemic.

That’s according to Michael McCully, partner at New View Advisors in a presentation at NRMLA’s summer virtual meeting last month, as well as in a recent interview with RMD. The NRMLA has also taken a further step by submitting a letter to the Consumer Financial Protection Bureau (CFPB) regarding the transition of the reverse mortgage industry to the LIBOR index.

Industry gears up to educate public servants

In order to adequately inform HUD of the specific impacts of the LIBOR transition on the reverse mortgage industry, NRMLA and its HMBS Issuers Committee worked with other financial markets subject matter experts to develop educational material that can be delivered to the HUD, McCully said.

“We are basically working in partnership with Ginnie Mae for these materials,” said McCully. “Ginnie Mae is de facto HUD’s in-house capital markets expert. HUD doesn’t have all the capital markets sense that Ginnie Mae would have, and you can’t blame them because there is a lot to learn. And so, they rely on Ginnie Mae for objective observations and perspective. “

The collaboration of the NRMLA and Ginnie Mae on these educational materials is important for the final transition away from LIBOR, since the authority related to the designation of a new index rests mainly with the HUD, explains McCully.

“HUD has ‘the pen’ when it comes to replacing LIBOR,” he says. “They have the one and only obligation and responsibility to change this LIBOR index. And so, to the extent that the industry can provide information to HUD on what makes the most sense from the perspective of borrowers, HMBS issuers, lenders, and all affiliates, we believe it is. our obligation to present this information to them.

First concern of the transition

When it comes to making the connection between the primary concern of the reverse mortgage industry in terms of which index ultimately chosen to replace LIBOR, a lot of it comes down to consistency with other financial services, says McCully. .

“Our primary concern is that we want our industry to adopt the same widely recognized liquid and dominant global index or set of indices as the rest of the mortgage industry. [will use], explains McCully. “We want to be in sync with the rest of the financial markets and don’t want to end up having a different index than the one used by the rest of the financial markets and the financial world. This is our primary objective.

On a call that took place with the organization responsible for developing the replacement indices – the Alternative Reference Rates Committee (ARRC) – it was heartening to hear how this organization appears to be in tune with the reverse mortgage industry interests, McCully said. .

“It was a great call. We are extremely encouraged by their level of engagement and their attention to topics that are important to the reverse mortgage industry in particular, ”he said. “First and foremost, they are in direct communication with the HUD. They’ve established a dialogue directly with HUD, and that’s very encouraging.

It was also learned on the call that forward versions of the likely replacement index, the Guaranteed Overnight Funding Rate (SOFR), are coming, McCully said.

“One month, three months and six months [variations of SOFR] are probably well advanced, ”he says. “One year [is] very doable. What the ARRC will do next is distribute a Request for Proposal (RFP) to assign the administrative role for the distribution of these indices. It’s scheduled for the third quarter.

Once the tender is awarded, there will be a series of SOFR-based indices that reflect different lengths of maturity, McCully says. Additional work to adapt the SOFR to more than one monthly index will be necessary

Enough time for the transition

While the time has certainly passed quickly, McCully is confident that there is enough time left for the transition away from LIBOR to be on time. That’s according to an interview with McCully after his presentation.

“HUD knows there is a need to replace LIBOR with a new index before 2022 and its staff have been working on the transition for some time,” McCully told RMD. “The HUD needs to have the new index in place by December 31, 2021, but it may be sooner if industry software, maintenance systems, contracts, etc. are ready. “

While he previously called SOFR a “likely” replacement index, that doesn’t mean the reverse mortgage industry’s concerns about choosing the CMT index have gone away. It’s still a possibility, according to McCully.

“Replacing LIBOR with CMT remains a concern for the industry. It is too early to know what HECM’s replacement index will be for LIBOR, ”he said.

That being said, Ginnie Mae and ARRC are still very receptive to the concerns that remain for the reverse mortgage industry, he adds.

“Ginnie Mae and the ARRC first understand that the industry needs an index that is publicly available and widely distributed,” he says. “[They also understand that] the new benchmark must deal with multiple maturities.

As 2021 appears to be fast approaching, McCully is confident that a replacement index will be chosen in time for the LIBOR sunset, he says.

“Almost 17 months is enough to go from LIBOR to its successful replacement,” he says.

NRMLA submits letter to CFPB regarding LIBOR transition

In June, the CFPB published guide related to the discontinuation of LIBOR in order to better facilitate the transition of creditors to no longer use it as an index for variable rate consumer credit products.

As the NRMLA actively applauds the CFPB in addressing the impact of the LIBOR extinction on lenders and consumers, it must do more to coordinate with Ginnie Mae and HUD to ensure that any replacement index is in line. changes being considered for Regulation Z, which requires lenders to provide monthly billing statements to borrowers and financial institutions and to notify borrowers of changes in interest rates on adjustable rate loans.

That’s according to a letter submitted by NRMLA to CFPB this month.

“If the HUD decides to switch from the HECM index to the SOFR as of January 1, 2021, lenders will have to comply in order to grant HECM loans insured by the FHA,” the letter reads in part. “However, as the proposed rule is being drafted, it is not clear to us how such a change required before March 15, 2021 would work. Close coordination with HUD and Ginnie Mae to finalize the proposed rule will, in our opinion, reduce the risk of such confusion. “

The NRMLA also urges the CFPB to coordinate with the ARRC regarding the creation of language for home equity line of credit documents on both front and back, while encouraging the Bureau to engage with consumers regarding the transition and how it may affect them.

“In the opinion of the NRMLA, the fact that the CFPB speaks with authority on this matter to consumers will greatly reduce the potential for confusion, which can arise if the CFPB leaves this education to a variety of lenders,” it reads. letter.

Find the letter on NRMLA’s website (membership of the association compulsory).

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