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Feb 11, 2020

LIBOR Transition: Fannie Mae and Freddie Mac to Stop Accepting LIBOR, Begin Accepting SOFR

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The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) announced on Wednesday, February 5th, that they will stop accepting LIBOR-indexed adjustable-rate mortgages (ARMs) by the end of 2020. Additionally, the two government sponsored agencies announced that they will soon accept mortgages tied to the Secured Overnight Financing Rate (SOFR) later in 2020. This announcement from Fannie Mae and Freddie Mac to move away from LIBOR and begin accepting SOFR ARMs is an important step in the market-wide transition to the Alternative Reference Rates Committee (ARRC) recommended SOFR.

Background

The ARRC, a working group established by the Federal Reserve Board of New York to help the transition away from LIBOR, has established a market consensus in favor of SOFR in the transition away from LIBOR. The ARRC is made up of members including Fannie Mae, Freddie Mac, lenders, investors, servicers and consumer advocates. In July 2019, the ARRC’s Consumer Products Working Group released a white paper detailing the use of SOFR in constructing newly issued ARMs. In November 2019, Fannie Mae and Freddie Mac announced that the agencies would begin to incorporate ARRC-recommended fallback language for new U.S. dollar close-end ARMs to replace LIBOR, in the event that it becomes unavailable, with SOFR.

Fannie Mae

On February 5th, Fannie Mae announced that by the end of 2020, Single-Family and Multifamily ARM loans indexed to LIBOR will no longer be accepted.[1]

The following table outlines eligibility requirements for LIBOR-indexed loan delivery to Fannie Mae:

 

Single-Family LIBOR ARMs

  • Must have application date on or before September 30, 2020.
  • Must be purchased as whole loans on or before December 31, 2020.
  • Must be purchased as MBS pools with issue dates on or before December 1, 2020.

Multifamily LIBOR ARMS

  • Must be designated as “under application” in the Deal Status field in DUS Gateway® on or before September 30, 2020.
  • Must be purchased as whole loans on or before December 31, 2020.
  • Must be purchased as MBS mortgage loans with issue dates on or before December 1, 2020.

 

Fannie Mae anticipates that it will be able to accept whole loan and MBS delivery of SOFR-indexed ARMs during the second half of 2020. There will be several new ARM plans using an index based on a 30-day average of SOFR. Fannie Mae expects to release additional details about these plans in the coming months, including the application start date, changes to eligibility, underwriting and pricing, new ARM notes and riders that must be used, impacts to Desktop Underwriter and Loan Delivery, and committing and delivery requirements such as timing.

The following table describes the features of the new Single-Family ARMs based on the 30-day average of SOFR:

 

ARM Product

Max Margin

ARM Subtypes and Prefix (MBS only)

Fixed Rate period

Reset Period

First Rate Change Caps

Subsequent Rate Change Caps

Life Cap (ceiling)

3 Year (3yr/6m)

300

85A SO

3 years

6 months

+2%/-2%

+1%/-1%

Up to +5%

5 Year (5yr/6m)

300

85B SO

5 years

6 months

+2%/-2%

+1%/-1%

Up to +5%

7 Year (7yr/6m)

300

85C SO

7 years

6 months

+5%/-5%

+1%/-1%

Up to +5%

10 Year (10yr/6m)

300

58D SO

10 years

6 months

+5%/-5%

+1%/-1%

Up to +5%

 

Fannie Mae expects to accept delivery of Multifamily SOFR-Capped ARM Loans or MBS Mortgage Loans by Q4 2020 at the latest. The SOFR-Capped ARM loans are expected to use an index based on 30-day average SOFR, published by the New York Fed. Fannie Mae will provide further information relating to Multifamily SOFR ARM Prefixes and Subtypes, along with confirmation of the 30-day SOFR index in the coming months.

Freddie Mac

In a bulletin[2] issued on February 5th, 2020, Freddie Mac announced that it will no longer purchase any LIBOR-indexed ARM with an application-received date on and after October 1st, 2020. Additionally, the agency announced that it will not purchase LIBOR-indexed ARMs on or after January 1st, 2021, regardless of the application-received date or note date.

Freddie Mac will also begin purchasing ARMs that use an index based on SOFR by November 1st, 2020 at the latest.

The following table describes the Single-family Hybrid ARMs based on a 30-day average SOFR:

 

 

Fixed Rate Period

Reset period

Initial Cap

Subsequent Cap

Life Cap

Index

3-year Hybrid (3/6m)

3 years

6 months

2%

1%

5%

30-day Average SOFR

5-year Hybrid (5/6m)

5 years

6 months

2%

1%

5%

30-day Average SOFR

7-year hybrid (7/6m)

7 years

6 months

5%

1%

5%

30-day Average SOFR

10-year hybrid (10/6m)

10 years

6 months

5%

1%

5%

30-day Average SOFR

 

Freddie Mac announced that it will be issuing future guidance on SOFR ARMs. This guidance will include the specific SOFR Index or Indices to be used for eligible SOFR ARM Notes, eligibility, underwriting and pricing requirements, updates to Loan Selling Advisor requirements, and new ARM Notes and riders specific to SOFR ARMs.

Authors and Contributors

Donna Parisi

Partner

Derivatives & Structured Products

+1 212 848 7367

+1 212 848 7367

New York

Geoffrey Goldman

Partner

Derivatives & Structured Products

+1 212 848 4867

+1 212 848 4867

New York

Azam Aziz

Partner

Derivatives & Structured Products

+1 212 848 8154

+1 212 848 8154

New York

Jennifer Oosterbaan

Associate

Derivatives & Structured Products

+1 212 848 7111

+1 212 848 7111

New York