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Ginnie Mae sets up LIBOR-to-SOFR transition for legacy CMOs
admin | October 9, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Ginnie Mae has taken its next and possibly biggest step away from LIBOR and towards SOFR. On November 7, the agency announced that all CMOs issued before March 2020 would use what is quickly becoming a standard approach to changing the index on its floating- and inverse floating-rate classes. Ginnie Mae had previously adopted the approach for CMOs issued in March or afterwards. This sets the path for transition in more than $165 billion of indexed Ginnie Mae securities, leaving only $45 billion in Home Equity Conversion Mortgages and less than $50 million of ARMs still linked to LIBOR.
Adopting all ARRC recommendations
Ginnie Mae has decided to adopt all Alternative Reference Rate Committee LIBOR fallback language and recommendations for legacy LIBOR-indexed securities for the transition to SOFR. The agency earlier this year updated REMIC documentation to incorporate the fallback language for securities issued after March 1, 2020. Ginnie Mae consequently will determine the key transition steps:
- When a LIBOR transition event has occurred
- The date for replacing LIBOR, and
- The replacement index and any necessary spread adjustment based on ARRC protocols
Ginnie Mae‘s approach transitions first to term SOFR as appropriate for the security. But if that is not available and approved by ARRC at the time of the transition, securities will switch to the 30-day compounded SOFR until term SOFR is available.
The language for legacy securities should match that used for new issues in the March 1, 2020, Base Offering Circular. It also conforms to the transition language used by Fannie Mae and Freddie Mac to ensure the transition will occur at the same time, using the same waterfall for benchmark index replacement and with the same spread adjustment recommended by ARRC for the appropriate SOFR index and tenor. Ginnie Mae has emphasized consistency in its approach to the LIBOR transition: consistency between the underlying loans and the security, between legacy and new securities, and between Ginnie Mae, ARRC and Fannie Mae and Freddie Mac.
Remaining Ginnie Mae LIBOR exposures
In September, Ginnie Mae announced it would stop securitizing LIBOR ARMs and HECMs on January 1, 2021, and stood ready to start securitizing loans indexed to SOFR whenever FHA or VA start to authorize them.
Ginnie Mae still has exposure to legacy HECMs and ARMs. That transition will depend on the Department of Housing and Urban Development, the Federal Housing Administration and the Veteran’s Administration. Because Ginnie Mae is only the guarantor of timely principal and interest on the MBS and not on the underlying loans, the agency has to partner with FHA and VA. Those agencies control the transition for the underlying loan index.
The ARM transition relies on FHA, which is the only agency that guarantees that kind of loan. FHA can either issue a mortgagee letter dictating changes or propose legislation. Both require detailed internal review by multiple departments within FHA or HUD. Although it is possible an announcement of the transition plan from LIBOR to SOFR will be made prior to year-end, it is more likely that this will be resolved in early 2021.
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john.killian@santander.us
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