LIBOR is an acronym being tossed around a lot. It is the London Interbank Offered Rate and has a major impact on mortgages in the US and around the world (as well as other financial markets). However, it’s going away soon and there are concerns mortgage markets aren’t prepared.
LIBOR is the reference index for setting interest rates on mortgages and millions of other financial contracts totaling $200 trillion in the US and about $400 trillion worldwide. It is being replaced by a new index, the Secured Overnight Financing Rate, or SOFR.
The Urban Institute has issued a new study that declares surprise “at how little prepared the markets are, but there are signs of progress. The first adjustable mortgage product based on the new index will be issued this year, fallback language has been established that allows for a substitution from LIBOR to SOFR to calculate mortgage payments, and the remaining issues focus on already outstanding adjustable-rate mortgages. There are also concerns about what happens if LIBOR does not fully disappear.”
The report cautions the government-sponsored enterprises, or GSEs (i.e., Fannie Mae and Freddie Mac), and the FHFA have the greatest influence on preparing the mortgage market for the transition from LIBOR to SOFR, as they can lead by example. “But their preparations have been slow. Surprisingly, less than 24 months before LIBOR’s expected sunset, 30-year mortgages are still being originated based on the fading LIBOR.”
Read more about LIBOR and mortgage markets.