Regulators have signaled that financial institutions should transition away from using the London Interbank Offering Rate (“LIBOR”) lending benchmark as it will be phased out by the end of 2021. If your office offers adjustable rate mortgages and uses the LIBOR index, we recommend that you start transitioning to a new index as soon as possible for new mortgage originations.
If you have existing loan products tied to the LIBOR index, you will need to select a replacement index when LIBOR is phased out. Your loan agreement should address what happens if the loan index becomes unavailable. For example, the FNMA Note states that “if the index is no longer available, the Note Holder will choose a new index which is based upon comparable information. The Note Holder will give me notice of this choice.”
In 2017, the Alternative Reference Rates Committee, a committee formed by the Federal Reserve, announced their recommendation for the Secured Overnight Financing Rate (“SOFR”) as an optional replacement for LIBOR. The New York Federal Reserve Bank publishes the Secured Overnight Financing Rate. Unlike LIBOR rates which rely on judgments by panel banks, SOFR rates are considered more suitable rates, in part, because they are based on actual transactions.
We expect that SOFR will be the preferred replacement for LIBOR. However, there has yet to be a formal proclamation from the relevant regulators. We recommend lenders wait until an industry-wide consensus emerges before selecting a replacement index for LIBOR-indexed mortgages.
We will be following developments on this issue and keep our clients updated as new details on the transition away from LIBOR emerge.
We would also like to remind our clients that our office will be closed on October 14, 2019 for Columbus Day.
242 W. Sunset, Ste. 201
San Antonio, TX 78209