By: Timothy A. Raty, Sr. Regulatory Compliance Specialist
Earlier this month, the Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) announced some of their plans for the gradual elimination (and replacement) of their adjustable-rate mortgages (“ARMs”) programs, which use the London Interbank Offered Rate (“LIBOR”) as the index for setting the adjustable interest rate (see FNMA LL-2020-01 and FHLMC Bulletin 2020-1).
Docutech has completed the following general roadmap for complying with changes made by these two Government Sponsored Agencies (“GSEs”):
The GSEs have adopted, for inclusion in their uniform ARM promissory notes and ARM riders, the final “fallback” language proposed by the Alternative Reference Rates Committee (“ARRC”; available at: https://www.newyorkfed.org/arrc/fallbacks-contract-language). This language provides a more comprehensive solution for replacing indices which become obsolete during the life of the loan. The GSEs have essentially adopted this language in nearly all of their ARM promissory notes and ARM riders (even those which use an index other than LIBOR). FNMA recommends that lenders adopt this new language as soon as possible and both GSEs require this language to be used for loans closed on or after June 1, 2020.
We are planning on making the following changes:
- Modifying our generic, conventional ARM notes and ARM riders to match the latest versions available on the GSEs’ websites (which versions include the “fallback” language);
- Because FHA requires their ARM notes to be based upon the GSE’s uniform promissory notes, with some specific changes (known as “FHA-Specific Modifications”) we will also be modifying our generic FHA ARM notes and ARM riders.
Please note, however, that there are some sentences in the new “fallback” language which conflict with the FHA-Specific Modifications which must be present in the FHA notes (e.g., the second sentences in Section 4[B] differ). In such situations, FHA requires the following:
“. . . To the extent that any variance [between the GSE and FHA model notes] is identified as an FHA-Specific Modification, however, the Mortgagee should adopt the change or use substantially similar language to ensure compliance with FHA rules and requirements.” (“Instructions for Model Notes (5/15)”; available at: https://www.hud.gov/program_offices/housing/sfh/model_documents)
We will carefully review these variances and determine whether the new “fallback” language is “substantially similar” and can be adopted for FHA ARMs or not.
- Because our VA ARM notes and ARM riders are slight variations of the equivalent GSE notes and riders, they will also be modified to include the new “fallback” language.
- We will be contacting clients who have custom ARM promissory notes to inquire as to whether they wish to have the “fallback” language added to their custom documents or not. Similarly, we will be contacting investors about whether they are planning to make any changes to their ARM notes and ARM riders.
- We will be modifying the “fallback” language which currently prints on our generic ARM Disclosures (Cx13457 & Cx14089) – which are provided pursuant to 12 C.F.R. § 1026.19(b)(2) – so that the language is compatible both for the current and future versions of our ARM notes and ARM riders.
Our estimated time for completing these changes is April 1, 2020. We will provide an announcement with further details about these changes when they are completed and will provide adequate time for clients to test documents before these changes are put in Production.
The GSEs require certain codes to be sent in the Uniform Loan Delivery Dataset (“ULDD”) file, when the “fallback” language is used in the ARM promissory note and ARM rider. This code is sent by loan origination systems (“LOS’s”), which may or may not be ready to submit these codes by April 1, 2020.
In order to accommodate clients who may have to wait past April 1st to use the “fallback” language, we have created an “ARRC Fallback Language Indicator” (FI 138607), which will be used to determine when this new language will print and will also be used to pushback information to the LOS, enabling them to determine when the new codes should be sent in the ULDD. While the new versions of the GSE ARM notes and ARM riders will print by default, clients who wish to wait on using the “fallback” language (and to have the current, pre-February 2020 versions of the ARM notes and ARM riders print) may set this indicator to “No” by contacting Client Support. We will also be contacting LOS partners on this matter, to determine what their plans are for supporting the ULDD codes.
The GSEs are planning to support new ARM programs “during the second half of 2020” which use an index based on a 30-day average of the Secured Overnight Financing Rate (“SOFR”). While new documents for these have yet to be published, the GSEs did provide some details about the features of these loans, such as their fixed rate periods (3/5/7/10 years), reset periods (6 months), first rate and subsequent change caps (ranging from 1 – 5%), and life cap ceiling (up to 5%).
We are planning to lay the preliminary steps for support of these loans by creating SOFR programs within ConformX and including SOFR as options for disclosures and fields connected with indices (e.g., the Loan Estimate and Closing Disclosure).
GSE Retirement of LIBOR-Based ARMs
The GSEs have announced that they will not purchase any ARMs which use LIBOR as the index, the applications for which are dated October 1, 2020 or later (such loans applied for before such dates will also not be purchased as whole loans after December 31, 2020, nor purchased in MBS pools with issue dates after December 1, 2020). To illustrate, if an ARM which uses LIBOR as an index is applied for on September 1, 2020 the GSEs will purchase it, but only if it is sold to them by one of the two December dates (i.e., if a lender attempts to sell it in January, 2021 the GSEs will not purchase it).
We plan to provide the ARM notes and ARM riders which use LIBOR as an index after such dates, since there may be clients who wish to continue support for LIBOR-based ARMs (and either keep them “in-house” or sell them to another investor who accepts LIBOR-based ARMs). However, we are planning on adding a warning in ConformX which alerts clients of the fact that the GSEs will not purchase these loans, if the application for the loan is dated October 1, 2020 or later.
Future Retirements of CMT and LIBOR Indices
The GSEs have also announced that they will discontinue purchasing ARMs in which the Constant Maturity Treasury (CMT) is used as the index, sometime in 2021. LIBOR itself will also be phased out towards the end of 2021 as well, which will end its usage as an effective index for any ARMs (whether sold to the GSEs or not).
We will continue to monitor these developments and make changes as more details and rules are promulgated.
If clients have any questions or concerns about these changes, they should contact Client Support (1.800.497.3584).