Ginnie Mae, with its publication of Multiclass Participants Memorandum (MPM) 23-01, has announced it will transition all outstanding LIBOR Classes of Ginnie Mae Multiclass Securities after June 30, 2023, to CME Term Secured Overnight Financing Rate (SOFR) plus tenor spread adjustment in accordance with the Adjustable Interest Rate (LIBOR) Act (LIBOR Act) and the related regulations, and the recommendations of the Alternative Reference Rates Committee (ARRC).
ARRC is a group of private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from U.S. dollar (USD) LIBOR to a more robust reference rate, its recommended alternative, the Secured Overnight Financing Rate (SOFR). The ARRC is comprised of a diverse set of private-sector entities that have an important presence in markets affected by USD LIBOR and a wide array of official-sector entities, including banking and financial sector regulators, as ex-officio members.
In July 2017, the United Kingdom’s Financial Conduct Authority (FCA) announced that it would no longer persuade or compel contributing banks to submit rates used to calculate London Interbank Offered Rate (LIBOR) after December 31, 2021.
On March 5, 2021, the Intercontinental Exchange (ICE) Benchmark Administration Limited (IBA) announced that it intended to cease publication of the overnight and one-, three-, six- and 12-month USD LIBOR immediately following the LIBOR publication on June 30, 2023.
Congress passed the LIBOR Act as part of the Consolidated Appropriations Act, 2022 (Pub. L. 117-103), in part, to create a clear and uniform process for replacing LIBOR in existing contracts where the terms do not provide for the use of a clearly defined or practicable replacement benchmark date, without affecting the ability of parties to use any appropriate benchmark rate in a new contract. Generally, for existing LIBOR-based ARMs without language providing for a specific replacement index, the default replacement index will be a spread-adjusted term rate based on the SOFR, as provided under the LIBOR Act.
The ARRC, in its Best Practices last updated on May 4, 2022, recommended the use of Term SOFR rates published by the CME Group Benchmark Administration Limited (CBA) plus the applicable spread adjustment as a fallback for legacy LIBOR adjustable-rate mortgages and the use of SOFR averages for new originations. Ginnie Mae has chosen to follow ARRC’s best practices recommendation.