Home Equity Conversion Mortgage (HECM) Program – Changes to Interest Rate Requirements Including Removal of the London Interbank Offered Rate (LIBOR) Index

  • Source: hud.gov

Treliant Takeaway:

Treliant’s Corporate & Regulatory Compliance practice stands ready to assist you as you navigate ever-changing regulations and resulting consumer lending requirements.  From transaction level through transformation, Treliant’s well-seasoned professionals can help.  LIBOR is ending and Treliant is ready and able to assist with any transition from LIBOR to SOFR, particularly in the mortgage space.

 Press Release Highlights:

  • On March 11, 2021, U.S. Department of Housing and Urban Development (“HUD”) issued guidance (2021-08) to all parties interested in the Home Equity Conversion Mortgage (“HECM”) Program concerning the UK’s Financial Conduct Authority’s (“FCA”) announcement that the London Interbank Offered Rate (“LIBOR”) would cease to be provided immediately after December 31, 2021, with additional currency setting cessations immediately after June 30, 2023.
  • The end of LIBOR as a benchmark rate has been discussed since 2017, with the FCA’s recent announcement providing a firm end date for publishing of the rate. With a reliance on survey data, rather than objective market data, LIBOR was known to be an unsuitable rate upon which to benchmark much of the world’s financial instruments, including the HECM Program.
  • The HUD letter removes approval for LIBOR as an index for adjustable rate HECMs and replaces its approval with the 30-day average Secured Overnight Financing Rate (SOFR) for newly originated HECMs on or after May 3, 2021. Mortgagees may all use the 10-year U.S. Constant Maturity Treasury (“CMT”) as an index. Additionally, rates are permitted to be commingled for new HECMs with zero as the “floor.” This is a notable departure as in the past, note rates were allowed to dip below 0 in a negative interest rate environment.
  • Adjustable rate HECMs represented 97.4% of new endorsements in FY2020, with most using LIBOR as an index, so the change is will significantly impact the HECM program.
  • With uncertainty surrounding the LIBOR index and Ginnie Mae’s September 2020 letter recognizing it will not securitize LIBOR-based adjustable rate HECMs, HUD’s announcement should mitigate some future disturbances resulting from the LIBOR transition and the effects that those disturbances may have on HECM borrowers.
  • HUD’s announcement should stabilize the HECM marketplace and allow for continued growth of the program in the future.