Hi, I’m Jacqueline Doty, and today I’m going to discuss the end of LIBOR, what it means for lenders and how they should prepare.
Sometime after 2021, LIBOR, the London Inter-Bank Offered Rate – the index used to set many adjustable mortgage rates, is expected to be discontinued.
Why is it being discontinued? Because the Financial Conduct Authority in the United Kingdom has announced that it will stop requiring banks to report the transactions that are used to calculate LIBOR.
In the US, this change affects an estimated $1.2 trillion dollars in adjustable-rate mortgages. To help facilitate the likely transition away from LIBOR, the Federal Reserve convened a working group called the Alternative Reference Rates Committee. The ARRC has recommended an alternative to the LIBOR index called the Secured Overnight Financing Rate (SOFR) and has started promoting its use on a voluntary basis.
What does this mean for Lenders and Borrowers?
It means that lenders with loans or lines of credit based on the LIBOR index will need to identify and review the terms of all of their LIBOR loans. A portfolio of loans likely contains a wide variety of terms regarding LIBOR, and this will need to be assessed. Here are some questions to consider:
1. Are there loans with terms that didn’t contemplate the end of LIBOR? Or perhaps they contemplated only a temporary suspension of LIBOR?
2. For loans that do have LIBOR fallback provisions:
What should lenders do at this point?
Between now and the end of LIBOR, there’s a good possibility that many loans will need to be modified because the fallback provisions are either nonexistent, unclear or impractical. For example, in some cases, the margin cannot be adjusted and it is either too high or too low when added to the new alternate index.
For loans requiring modification, lenders should begin contacting borrowers well in advance of the potential change in the index.
But there’s no need to panic just yet. The good news is there’s still time to successfully manage a smooth and efficient transition. Now is a good time for lenders to start auditing their loan data and documents and planning for fulfillment of amendments or borrower notifications.
If you found this information helpful, please visit corelogic.com and search for “LIBOR” to learn more about our end of LIBOR solutions.
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