The US Department of Housing and Urban Development (“HUD”), Office of Housing, recently published a Proposed Rule in the Federal Register that would establish a framework to transition away from LIBOR to new alternative indices. Adjustable-Rate loans guaranteed by the Federal Housing Administration are currently required by regulation to be based on one of two indices: weekly yield on Treasury securities (“CMT”) or 1-year LIBOR. 24 CFR 203.49(b).
LIBOR has been scheduled for discontinuation (at the end of 2021) for many years now as a result of scandals related to manipulation of the index and its role in exacerbating the 2008 financial crisis. A handful of LIBOR indices will continue to be published through mid-2023 for maintenance purposes, but new contracts were set to end by the end of 2021. Other agencies, such as the GSEs, Fannie Mae and Freddie Mac, have already discontinued all products based on LIBOR and replaced them with loans based on the new alternative index, the Secured Overnight Financing Rate (“SOFR”).
Since FHA is limited to the index they may accept for eligible mortgages by regulation, the FHA needed to engage in rulemaking to make an allowance for use of an alternative index. The proposed rule, published October 18th, would allow for use of the SOFR index in place of the LIBOR index. With the addition of SOFR, FHA adjustable-rate loans would be eligible to use either CMT or SOFR for new loans. The proposed rule would also layout a process for transitioning existing adjustable-rate loans based on LIBOR to use SOFR in the future, as specified in the LIBOR act (which we recently wrote about here).
HUD is seeking public comment on the proposed rule for 30 days following its publication. (Typically the comment period would be 60 days but HUD found good cause to reduce the period to only 30 days.)
