LIBOR, the London Inter-Bank Offered Rate, is expected to discontinue sometime after 2021, but as the index used to set many adjustable mortgage rates, what will happen next?
Jacqueline Doty, Executive, Product Management, Collateral Risk Solutions at CoreLogic, explained that the end of LIBOR will impact $1.2 trillion dollars in adjustable-rate mortgages.
"It means that lenders with loans or lines of credit based on the LIBOR index will need to identify and review the terms of all of their LIBOR loans," said Doty. "A portfolio of loans likely contains a wide variety of terms regarding LIBOR, and this will need to be assessed."
LIBOR's end is likely to impact more than lenders and borrowers. According to Fitch Ratings, U.S. RMBS servicers showed an improved awareness of difficulties and implications tied to the anticipated expiration of LIBOR at the end of 2021.
To help facilitate the likely transition away from LIBOR, Doty notes that the Federal Reserve convened a working group called the Alternative Reference Rates Committee. The ARRC has recommended an alternative to the LIBOR index called the Secured Overnight Financing Rate (SOFR) and has started promoting its use on a voluntary basis.
Lenders may need to face modification. Between now and the end of LIBOR, there’s a good possibility that many loans will need to be modified because the fallback provisions are either nonexistent, unclear or impractical.
"For example, in some cases, the margin cannot be adjusted and it is either too high or too low when added to the new alternate index," Doty said.
But there’s no need to panic just yet," she adds. "The good news is there’s still time to successfully manage a smooth and efficient transition. Now is a good time for lenders to start auditing their loan data and documents and planning for fulfillment of amendments or borrower notifications."