9.18.20
A new report from Moody’s highlights that a majority of LIBOR adjustable rate mortgages (ARM) securities could experience interest rate shortfalls or principal losses because of weak contract language. Out of 2,719 LIBOR-indexed RMBS deals rated by Moody’s, 59% contain contract provisions which could potentially reset deals at the last published rate, 15% do not contain contract provisions regarding the LIBOR availability, and 26% contain contract provisions replacing LIBOR with an alternative rate. The report also noted that deals closed in 2018 or later were more likely to have provisions regarding a LIBOR discontinuation. Moody’s notes that there are several ways to avoid these risks such as using the Alternative Reference Rates Committee (ARRC) recommended fallback language developed under the leadership of SFA as Co-Chair of the ARRC Securitization Work Group or amending their contracts after closing to include such stronger fallback language.