MetaSource Mortgage Blog

Servicer Worries Compounded by Prospect of Having to Scrutinize Portfolio of ARMs for LIBOR Terms

Monday, July 01, 2019

Servicer Worries Compounded by Prospect of Having to Scrutinize Portfolio of ARMs for Terms

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

At MetaSource, we specialize in creating business process and document management solutions tailored to the needs of the mortgage industry, with state-of-the-art technology that can streamline the most complex document classification challenges.

We have a wide variety of mortgage document and data management tools that can replace document wrangling with searchable databases and customizable workflows that transform complex mortgage processes across the landscape, from loanboarding to QC and everything in between.

We can help you take the first steps toward achieving visibility into your portfolio, with advanced technology, including Optical Character Recognition (OCR) and Robotic Process Automation (RPA), that can scan loan documents and search for the specific language that will identify where action is required – leaving you more time to consider best practice for conversion of your ARM products in 2021 and beyond.

What's more, it's technology you can leverage for additional efficiencies, automating the search and retrieval of documents by any number of other details, filtering by maturity date, by action needed or action taken, or to validate data for compliance reviews.

Leave the panicking to your competitors and click on the link below to learn more about the range of streamlining options we can provide.

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