Adjustable-Rate Mortgage Index Change

The lending industry is changing the index used to determine payments for Adjustable-Rate Mortgages (ARMs).

The London Interbank Overnight Rate (LIBOR) index has been used for decades, but it is being phased out in favor of a new index called the Secured Overnight Financing Rate (SOFR).

The switch from LIBOR to SOFR is expected to have a relatively limited effect on most borrowers, but there is a chance it could impact your ARM’s monthly payment. If you have an existing ARM with us, you will receive written notification about your specific loan terms in 2022. 

Please give us a call if you have any questions:

• Existing Mortgages – 800-232-8101, ext. 5125
• New Mortgages – 888-334-5120  

If you’re interested in learning more about the change from LIBOR to SOFR, keep reading for some industry information.

LIBOR is currently the most widely used global interest rate benchmark, and it is deeply embedded in global financial products. 

Recently, the long-term viability of LIBOR has been undermined due to cases of rate manipulation, low volumes for underlying interbank transactions, and the reluctance of panel banks to submit quotes used to calculate LIBOR.   

As a result, the Financial Conduct Authority (FCA), the British regulator of the LIBOR benchmark administrator, has warned that:

• Publication of LIBOR is not guaranteed beyond 2021
• Sustainability of LIBOR is in question due to the absence of active market support
• The cessation of LIBOR poses a financial stability risk without advanced preparation

To prepare for the transition from LIBOR, public sector and private market participants have undertaken a series of benchmark reform initiatives, including the design and selection of robust Alternative Reference Rates (ARR) and the incorporation of comprehensive fallback language into derivative and cash products.

The Alternative Reference Rates Committee (ARRC) is a group of private market participants convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York (NY Fed) to support a successful transition from U.S. Dollar (USD) LIBOR to an ARR. The ARRC recommended the SOFR as a replacement index for USD LIBOR-indexed contracts.

SOFR is an overnight interest rate based on USD Treasury repurchase agreements (repos). The ARRC recommended SOFR because it is:

• Based on observable market transactions from a robust and well-defined market that was able to weather the global financial crisis
• Produced in a transparent, direct manner
• Produced by the NY Fed and meets international benchmark standards

On March 2, 2020, the NY Fed began daily publication of 30, 90, and 180-day compound historical averages of SOFR. The Government-Sponsored-Enterprises (GSEs) will use the NY Fed’s 30-day compound historical average of SOFR (“30-Day Average SOFR”) as the index in many new products (e.g., SF ARMs).  

For historical tracking of this new rate, go to the New York Federal Reserve SOFR rate data and background.