Federal Reserve, GSEs Announce LIBOR Replacement Rates
Written By: Joel Palmer, Op-Ed Writer
The Federal Reserve Board recently adopted a final rule to identify and implement replacement rates for LIBOR. Fannie Mae and Freddie Mac also announced last week their replacement rates for legacy LIBOR products.
LIBOR, formerly known as the London Interbank Offered Rate, was the dominant benchmark rate used in financial contracts for decades, including adjustable rate mortgages and home equity lines of credit.
However, it was fragile and subject to manipulation. The transition away from LIBOR has been in the works for several years due to a criminal rate-setting conspiracy.
As of the end of 2021, no new financial contracts can reference LIBOR as the relevant index . Starting in June 2023, LIBOR can no longer be used for existing financial contracts.
Last year, Congress enacted the Adjustable Interest Rate (LIBOR) Act to provide a uniform, nationwide solution for contracts that did not have clear and practicable provisions for replacing LIBOR next year.
As required by the law, the Federal Reserve Board’s final rule identifies replacement benchmark rates based on the Secured Overnight Financing Rate (SOFR) to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the act. These contracts include U.S. contracts that do not mature before LIBOR ends and that lack adequate "fallback" provisions that would replace LIBOR with a practicable replacement benchmark rate.
The final rule also ensures that LIBOR contracts adopting a benchmark rate selected by the board will not be interrupted or terminated following LIBOR's replacement.
Shortly after the Federal Reserve’s final rule, Fannie Mae and Freddie Mac announced the replacement indices for legacy LIBOR loans and securities.
The transition will include legacy LIBOR-indexed single-family adjustable-rate mortgages (ARMs), derivatives, multifamily floating rate loans, multifamily floating rate mortgage-backed securities, collateralized mortgage obligations and credit risk transfer securities.
Their transition plans are as follows:
For single-family ARMs, Freddie Mac servicers will be instructed to transition to the all-in spread-adjusted term SOFR reference rates recommended by the Federal Reserve Board and administered and published by Refinitiv Limited, which include a one-year transition period.
Derivatives will generally use the benchmark replacements identified in the 2020 fallbacks protocol published by the International Swaps and Derivatives Association.
Multifamily floating rate loans, multifamily floating rate mortgage-backed securities, collateralized mortgage obligations and credit risk transfer securities will transition to the all-in replacement rates recommended by the Federal Reserve Board for FHFA-regulated-entity contracts. These rates are composed of the 30-day average SOFR rate published by the Federal Reserve Bank of New York, plus an applicable tenor spread adjustment.
The transition to the replacement indices for both enterprises will occur the day after June 30, 2023.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
