The Mortgage Bankers Association created a template for servicers to notify borrowers when their adjustable-rate mortgage switches to a different index once publication of the London interbank offered rate discontinues.
Most existing residential ARMs have interest rates tied to Libor, with approximately $1.2 trillion of unpaid principal balance, according to the Alternative Reference Rates Committee.
A shift to a replacement index is governed by the terms of the loan documents; most but not all call for the switch to one that is supposed to act similarly to Libor. There are some documents that freeze the rate at the last published date, panelists at the MBA’s National Secondary Market Conference in May pointed out.
“As the industry moves closer to a potential sunset of Libor, MBA is taking the lead to help its members communicate to consumers how the switch to a new index would affect them if they choose a Libor-indexed adjustable-rate mortgage product,” Pete Mills, senior vice president of residential policy and member services, said in a press release. “The disclosure template is one of the many ongoing steps that MBA is taking well in advance to ensure a smooth transition away from Libor.”
The trade group recently sounded the alarm for its commercial and multifamily members in preparation for the discontinuation of Libor in 2021, when financial regulators in the United Kingdom will no longer require or encourage banks to publish the rate.
Secured overnight financing rate aggregated by the Federal Reserve Bank of New York is being promoted as the main alternative to Libor. Since Memorial Day, both indices have performed similarly, the exception being May 31 when an end-of-the-month methodology resulted in a spike in the SOFR. Libor is currently published by the Intercontinental Exchange.
The disclosure notifies borrowers that Libor “may be discontinued during the term of your loan. This disclosure shares what you need to know about Libor and any potential changes that could impact your loan.”
There is a section about the servicer picking an alternative index consistent with the terms of their note.
“We want you to know that the alternative index may behave differently than Libor has historically behaved. Any index changes will not change most other terms of your ARM, such as the maximum interest rate you may pay during the term of the loan or the timing of any interest rate resets,” the disclosure said.
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