HUD Issues Final Rule for Transitioning From LIBOR For Adjustable-Rate Mortgages

On March 1, 2023, the Office of Housing, US Department of Housing and Urban Development (“HUD”) issued its final rule addressing the imminent end of LIBOR. 88 FR 12822–12829. The final rule essentially adopts HUD’s October 9, 2022 proposed rule, see 87 FR 83458, and includes relatively minor changes prompted by public comments on the proposed rule. By adopting the spread-adjusted Secured Overnight Financing Rate (“SOFR”) to replace LIBOR as an index for forward and Home Equity Conversion Mortgage (“HECM” or “reverse”) adjustable-rate mortgages (“ARM”), HUD joins Fannie Mae, Freddie Mac, and Ginnie Mae in finalizing the transition to SOFR before publication of LIBOR ceases on June 30, 2023.

HUD first adopted LIBOR as an acceptable index for the forward and HECM ARMs it insures in 2007. HUD’s model forward ARM note issued in 2015 provides that if LIBOR is “no longer available,” the noteholder will choose a new index “based upon comparable information,” while its model HECM ARM note (also issued in 2015) states that if LIBOR is “no longer available,” the HUD Secretary will “prescribe” a new index. On March 11, 2021, HUD removed LIBOR as an approved index and approved SOFR for new HECM mortgages that closed on or after May 3, 2021. It also issued new model HECM ARM mortgages and notes containing fallback provisions to address future index transitions based on model language for ARMs issued by the Alternative Reference Rates Committee.

The final rule addresses existing forward and HECM ARMs that still use LIBOR as an index. For forward ARMs, the rule amends 24 CFR § 203.49(b)(1) to require that interest on a forward ARM be based on either the U.S. Constant Maturity Treasury (“CMT”) index, the 30-day average SOFR, or an alternative SOFR tenor approved by the Secretary. It also amends § 203.49(b)(2) to require that existing ARMs that use LIBOR transition to the Secretary-approved spread-adjusted SOFR replacement index by the next interest rate adjustment date for the mortgages on or after June 30, 2023 (unless the Board of Governors of the Federal Reserve System determines that LIBOR will cease to be published or cease to be representative on a different date).

For HECM ARMs, the final rule makes similar amendments to § 206.21(b)(1)(ii) requiring that rates for those mortgages correspond to the CMT index, the 30-day average SOFR, or an alternative SOFR tenor approved by the Secretary. The new SOFR replacement rate applies to both annual and monthly HECM ARMs under a new paragraph, § 206.21(b)(3), which states that any HECM ARMs with rates indexed to LIBOR “must be transitioned to the spread-adjusted SOFR replacement index approved by the Secretary by the next interest rate adjustment date for the mortgage on or after [June 30, 2023].”

In addition to its LIBOR-related amendments, the final rule also establishes a ten-percentage point maximum lifetime cap on the adjustment in either direction from the initial rate for monthly HECM ARMs. See § 206.21(b)(2)(iii).

The final rule will be effective March 31, 2023.