FHA Issues Guidance on Removal of LIBOR from HECM Program

FHA recently issued a mortgagee letter, Mortgagee Letter 2021-08 (ML 21-08), which, among other things, removes approval for use of the LIBOR index for adjustable rate HECMs and establishes the timeline for discontinuing the eligibility of FHA insurance for LIBOR-based adjustable rate HECMs.

In addition to removing approval for use of the LIBOR index, among other things, ML 21-08: (i) establishes the acceptance of the Secured Overnight Financing Rate (SOFR) index for establishing the note rate of interest on adjustable rate HECMs; (ii) permits mortgagees to commingle index types, when SOFR is used as an index to set the note rate, by using the U.S. Constant Maturity Treasury (CMT) ten year swap rate when establishing the expected average mortgage interest rate to determine the amount of loan principal available under such loans; and (iii) sets zero as the “floor” for the index value used to determine the Note rate on adjustable rate HECMs.  Moreover, ML 21-08 provides new model Note language for adjustable rate HECMs, which is included in the revised model adjustable rate HECM Notes that are available here.

The policy changes to the definition of the expected average mortgage interest rate, interest rate index for annual adjustable rate HECMs, monthly adjustable rate HECMs, and interest rate index floor are effective for HECMs closed on or after May 3, 2021.  Note that all LIBOR-based HECMs must close on or before May 3, 2021, to be eligible for FHA insurance.  Regarding the revised model Notes, as of March 11, 2021, mortgagees may use the revised documents for all CMT-based HECMs and must use the revised documents for all SOFR-based HECMs.  However, mortgagees must use the revised model Notes for all adjustable rate HECMs closed on or after July 1, 2021.

FHA stated that it will issue guidance regarding existing LIBOR contracts at a future date.