On March 1, 2023, the Federal Housing Administration (“FHA”) published a Final Rule in the Federal Register that replaces the London Interbank Offered Rate (“LIBOR”) index with the Secured Overnight Financing Rate (“SOFR”) index as a Secretary-approved index for adjustable rate mortgages (“ARMs").
Prior to the final rule, adjustable-rate loans guaranteed by the FHA were required by regulation to be based on only one of two indices: weekly average yield on U.S. Treasury securities (“CMT”) or 1-year LIBOR. 24 CFR 203.49(b). After the effective date of the final rule, newly endorsed forward ARMS must select the 30-day average SOFR index or the CMT index. Existing LIBOR-indexed, FHA-insured ARMs will also be able to transition to a spread-adjusted SOFR index to provide a comparable rate. Additionally, there will be no change to the per-adjustment and lifetime caps on total adjustments for existing FHA-insured ARMs.
The LIBOR index was scheduled for discontinuation (at the end of 2021) for many years as a result of scandals related to manipulation of the index and its role in exacerbating the 2008 financial crisis. 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 SOFR index. The final rule states that the move from LIBOR to SOFR is a crucial step for aligning with the GSEs, and in the best interests of borrowers and mortgagees.
The final rule adopts, with minor changes, the previously proposed rule issued by HUD in October 2022 which established a framework to transition away from LIBOR to the new SOFR index. In response to comments received to the proposed rule, the final rule states that there are plans to revise and publish a Model Note that corresponds to new requirements. HUD will be publishing a Mortgagee Letter to implement the requirements of the final rule.
DocMagic recently released new versions of FHA-specific notes, riders, and security instruments based on the updated Fannie Mae and Freddie Mace uniform instruments. Updated FHA ARM notes are currently only available with the CMT index. DocMagic will also make ARM notes available for the 30-day average SOFR index after the March 31, 2023 effective date.
