Fannie Mae [1] has announced the replacement indices for the legacy LIBOR loans and securities for which Fannie Mae is responsible for selecting the replacement index. The replacement indices, outlined below, are the benchmark replacements recommended by the Federal Reserve Board, and are based on the Secured Overnight Financing Rate (SOFR) [2]. The transition to these replacement indices will occur the day after June 30, 2023, the last date on which the Intercontinental Exchange, Inc. (ICE) Benchmark Administration Limited [3] will publish a representative rate for all remaining tenors of USD LIBOR.
This announcement follows the Federal Reserve Board’s publication of the final rule pursuant to the Adjustable Interest Rate (LIBOR) Act of 2021 [4]. Under that Act, the Federal Reserve Board is the regulator required to select the benchmark replacement for legacy USD LIBOR contracts that are governed by U.S. law.
“Our announcement today represents a key milestone necessary to prepare the mortgage market for the cessation of LIBOR,” said Bob Ives, Chief Investment Officer for Fannie Mae [5]. “It has always been our goal to support an orderly and successful transition from LIBOR in coordination with the Federal Housing Finance Agency, the Alternative Reference Rates Committee, and other mortgage market participants and we will continue to work toward that goal.”
The replacement index, as specified in the final rule, for each legacy LIBOR product is as follows:
- Fannie Mae’s Single-Family Adjustable-Rate Mortgages (ARMs) and related mortgage-backed securities will be replaced by Relevant tenor of CME Term SOFR + applicable Tenor Spread Adjustment (Transition Tenor Spread Adjustment during the first year)
- Fannie Mae’s Multifamily ARMs and related mortgage-backed securities will be replaced by the 30-day Average SOFR + Tenor Spread Adjustment
- Fannie Mae’s Single-Family and Multifamily Credit Risk Transfer (CRT) securities will be replaced by the 30-day Average SOFR + Tenor Spread Adjustment
- Fannie Mae’s Single-Family and Multifamily Collateralized Mortgage Obligations (CMOs) will be replaced by the 30-day Average SOFR + Tenor Spread Adjustment
- Fannie Mae’s Derivatives generally use the benchmark replacements identified in the 2020 fallbacks protocol published by the International Swaps and Derivatives Association (ISDA)
“The announcement of replacement rates for their LIBOR-indexed products today by Fannie Mae and Freddie Mac represents one of the closing milestones in the transition to more robust reference rates to replace LIBOR,” said Federal Housing Finance Agency (FHFA) Director Sandra L. Thompson [6]. “FHFA and its regulated entities have worked closely with the Alternative Reference Rates Committee and the Official Sector to ensure a transparent and smooth transition.”