We recently discussed the efforts of the Alternative Reference Rates Committee (ARRC) to prepare for the upcoming discontinuance of LIBOR as an index rate for residential mortgage and consumer loans. Our alert examined ARRC’s recommendations regarding an appropriate substitute rate (the Secured Overnight Financing Rate, or SOFR) and ARRC’s recommended changes to implement SOFR. We also noted that Fannie Mae and Freddie Mac (the GSEs) were expected to issue guidance that SOFR was an appropriate substitute for LIBOR and provide transition steps.
On February 5, 2020, Fannie Mae issued Lender Letter LL-2020-01, and Freddie Mac issued Bulletin 2020-1, both of which included the following announcements and key dates:
- All Fannie Mae/Freddie Mac uniform notes and riders have been updated to include the ARRC recommended fallback language, applicable in the event LIBOR is no longer available or appropriate as a rate for residential adjustable-rate mortgage loans (ARMs). The updated forms are available for use now, but must be used for ARMs with note dates on or after June 1, 2020.
- To be eligible for delivery to a GSE, LIBOR ARMs must have application dates on or before September 30, 2020.
- LIBOR ARMs must be in mortgage-backed securities (MBS) pools with issue dates on or before December 1, 2020, or purchased as whole loans on or before December 31, 2020. All LIBOR ARM plans will be retired by the end of the year.
- The GSEs anticipate that they will be able to accept whole loan and MBS delivery of SOFR ARMs during the second half of 2020. Additional details regarding SOFR ARM plans will be detailed in the coming months.
- Beginning on a yet-to-be-determined date in 2021, the GSEs will retire all constant maturity Treasury securities (CMT) plans, and will no longer acquire CMT-indexed ARM loans. The GSEs caution against increased use of CMT-indexed ARMs as lenders wind down their use of LIBOR ARMs.
The GSEs’ issuances do not address the replacement of LIBOR on existing ARM loans, although we expect them to provide guidance on that later this year.