Uncertainty over what will replace the long-used London interbank offered rate (LIBOR) as an index for adjustable rate mortgages (ARMs) if it is phased out in 2021 as expected has mortgage servicers with large portfolios of adjustable rate loans scrambling to establish next steps.
The head of pricing and execution for Freddie Mac described industry concerns as “almost Y2K-ish” according to a National Mortgage News account of a recent panel discussion at the Mortgage Bankers Association National Secondary Market Conference.
In April, the publication described “an alarming lack of progress” in preparations for conversion in the two years since it became known that LIBOR was on its way out as a global reference lending rate.
LIBOR is the index tied to the majority of ARMs originated prior to 2019, with an estimated $1.2 trillion in retail mortgages pegged to the index, according to a 2018 report by the Alternative Reference Rates Committee, a banking and financial sector industry group convened by the Federal Reserve Board and the New York Fed to oversee a transition from LIBOR to a new reference rate.
A recent MBA survey of commercial and multifamily lenders found that while nearly all have begun planning for a transition away from LIBOR, there is still no consensus around what the transition will look like. Less than a third of the firms interviewed said they will transition to an alternative index before LIBOR is phased out; 37% didn't know.
Finding the LIBOR Mortgages in the Haystack of Blended Portfolios
Entities servicing ARM loans tied to LIBOR will need to provide notice regarding change in referenced index. While big-picture challenges revolve around settling on and transitioning to a replacement index that will work for both the secondary market as well as for new borrowers, the initial disruption for many servicers is likely to hit closer to home – with the logistical hurdle of having to identify thousands or even tens of thousands of mortgages caught up in the shift.
Among details that will have to be combed from the records will be individual maturity dates and the terms around notification of the mortgage holder for any reset of the rate or the index used as the base.
A portfolio of acquired loans is likely to contain a wide variety of terms and language that will need to be identified and prioritized for notification purposes.
Visibility into Your Portfolio is the First Step
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