HUD Publishes Mortgagee Letter to Implement the LIBOR ARM Final Rule

HUD recently published Mortgagee Letter 2023-09 (ML) to implement the provisions of the Adjustable Rate Mortgages: Transitioning from London Interbank Offered Rate (LIBOR) to Alternative Indices final rule that was published on March 1, 2023.  WBK previously wrote about the final rule here. 

The ML includes several updates to HUD Handbooks 4000.1, 4235.1, REV-1, and 4330.1, REV-5.  Importantly, the ML provides direction as to how mortgagees must transition mortgages from LIBOR to the SOFR index.  For example, the ML outlines that mortgagees must use the applicable Refinitiv USD IBOR Consumer Cash Fallback (Refinitiv) spread-adjusted CME Term SOFR tenor replacement index (with varying terms as described further in the ML) to calculate the periodic adjustments to the mortgage interest rate, and explains that mortgagees must provide borrowers with notices meeting certain requirements at least 25 days prior to the next periodic adjustment of the interest rate.  Other highlights from the ML include: the addition of language to HUD Handbook 4000.1 establishing that, in connection with adjustable rate HECMs, the maximum lifetime note rate “may not be more than ten percent higher than the initial note rate;” and, a note that FHA revised the model loan documents for first and second HECM adjustable interest rate notes to be consistent with the changes announced in the final rule and the ML.

Most of the changes announced in the ML were effective immediately, while the sections of the ML related to the transitioning of existing LIBOR-indexed ARMs and adjustable rate HECMs are effective as of “the next interest rate adjustment date on or after the first London banking day after June 30, 2023.”  The revised HECM model notes may be used immediately but must be used for all case numbers assigned on or after July 1, 2023.