ABA-led coalition calls for roadmap for FHA-insured mortgage products post-Libor

The American Bankers Association (ABA) and a coalition of trade groups have responded to a notice of proposed rulemaking from the Department of Housing and Urban Development (HUD) by asking the Federal Housing Administration (FHA) for a clear roadmap for servicers of FHA-insured adjustable-rate mortgage products, post-Libor.

The Federal Housing Administration, which is set to transition from Libor to alternative reference rates, should provide a roadmap that includes specifications of a replacement index for Libor for existing mortgages and outline further guidance on communications with borrowers, according to the group.

“It is critical that servicers feel confident that by transitioning to a HUD-approved replacement comparable index, they are not breaching contractual terms and are not subject to increased litigation risk,” the groups said.

They added that the replacement index selected by HUD should be based on observable transactions and be subject to established governance processes.

The Office for the Comptroller of the Currency (OCC) has confirmed that US regulators will not permit any new Libor exposures after December 31 2021, which has been phased out over the past few years and replaced by other approved rates such as the secured overnight financing rate (SOFR) for the pricing of loans.

Last year, regulators issued guidance giving banks greater freedom in their choice of alternatives to the Libor benchmark and economists and financial theorists have praised the opportunity to exercise choice when pricing loans.

In October 2021, acting comptroller of the currency Michael Hsu, said at the alternative reference rates committee symposium: “As the banking sector has weathered the pandemic with relatively healthy balance sheets, it may be tempting for bank management to become complacent about continued and emerging risks such as Libor replacement.

“This complacency can have a profound negative effect on bank operations, safety, and soundness.”