7.17.19
Federal Housing Finance Agency (FHFA) Director Mark Calabria said last week that mortgage giants Fannie Mae and Freddie Mac will eventually halt purchases of U.S. home loans underwritten with LIBOR. Set to be phased out after 2021, LIBOR is referenced against $200 trillion worth of U.S. financial products, the majority of which are interest rate derivatives. Approximately $1 trillion in adjustable-rate mortgages (ARM), representing 6.5% of all outstanding mortgages, are LIBOR dependent.
“We have not yet told Fannie and Freddie to stop buying LIBOR ARMs, but this is a day that will come,” Calabria told Reuters last Wednesday. “We are trying to minimize risk going forward.”
Regulators have urged financial markets and institutions to shift to alternative rates. LIBOR manipulation – born of an extensive UK rigging scandal – plagued global markets for years, prompting the Bank of England’s decision to terminate the benchmark after a multiyear transitionary period.
There is widespread industry concern that the transition from LIBOR could provoke substantial market disruptions. Banks, lenders and investors, regulators say, are alarmingly unprepared to face this challenge.
“We need a mindset shift where firms realize that every new U.S. dollar LIBOR contract written digs a deeper hole that will be harder to climb out of,” New York Federal Reserve President John Williams said at an industry event last Monday.
The Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board, recently issued an instructive “white paper” on the U.S. mortgage market’s ongoing adoption of LIBOR alternatives. The ARRC identified the Secured Overnight Financing Rate, or SOFR, as its preferred replacement benchmark.
Calabria said the transition should include an increased effort to educate consumers about LIBOR and its potential replacements. “We just need to get some education on this,” he told Reuters. “I don’t want to wake up one day and have millions of mortgage borrowers feel like they were hoodwinked or sold something they did not understand.”
Read More via Reuters