Seven years after traders were caught boasting in emails and instant messages about cracking open bottles of champagne to celebrate their ability to manipulate the London Interbank Offer Rate, or LIBOR, the Federal Reserve issued a report with the framework for issuing new ARM mortgages based on a U.S. index.
While it was previously known that the Fed’s Alternative Reference Rates Committee was focusing on a new index based on the Fed’s Secured Overnight Financing Rate, known as SOFR, Thursday’s report discusses how it could be used for home loans. The 13-page paper is titled “Options for Using SOFR in Adjustable-Rate Mortgages.” LIBOR is used for more than $200 trillion U.S.-dollar denominated assets.
LIBOR underpins about $1.2 trillion of existing ARMs, and there are more than $150 billion new ARMs originated a year. The committee known as ARRC intends to issue a separate paper on July 12 with “fallback contract language for consumer mortgages” for lenders and securitizers, the Fed said Thursday.
In a private briefing with HousingWire ahead of the report’s release, senior officials at Fannie Mae and Freddie Mac, who requested they not be named, said they are laying the groundwork to have a non-LIBOR product in place well before the scandal-plagued British index ceases to exist. Based on comments from the UK’s Financial Conduct Authority, most people expect LIBOR to die by the end of 2021.
“At the GSEs, we are both intent on leveraging the framework to build a SOFR-indexed product before 2021,” a senior Fannie official told HousingWire. “The framework outlined in white paper is comparable to today’s exiting LIBOR-based ARM product.”
It takes 18 to 20 months to role out a new product, and the work is already underway at the GSEs, both officials said. While the focus of Thursday’s report is new ARM mortgages, legacy products will be addressed next, the senior Freddie Mac official said.
“This initial effort was purposefully focused on new originations,” said the Freddie official. “We intend to work with the industry very closely and be ready before the end of 2021 to role out a new ARM product based on an average of SOFR. The next agenda item is to focus on legacy products.”