On April 13th, 2020, the Alternative Reference Rates Committee (ARRC) welcomed Fannie Mae and Freddie Mac’s announcements giving additional details on their new adjustable-rate mortgage (ARM) products, which are indexed to the 30-day Average Secured Overnight Financing Rate (SOFR), the ARRC’s recommended alternative to U.S. Dollar (USD) LIBOR.1
What this means
These developments by Fannie Mae and Freddie Mac build on the announcement by the Federal Housing Finance Agency’s (FHFA) announcement in February 2020 that the agencies would stop accepting ARMs indexed to LIBOR by the end of this year, and that they would adopt the ARRC’s fallback language to facilitate a smooth transition away from LIBOR.2 In their announcements Fannie Mae and Freddie Mac confirmed eligibility, underwriting and delivery requirements for residential SOFR-based ARMs to provide clarity to all participants in the consumer loan market.3 These actions are expected to result in an outcome where consumers are less exposed to the risks inherent in the process of the cessation of LIBOR.
Tom Wipf, ARRC chair, commended both agencies for the “significant progress” they have made in transitioning the consumer loan market toward SOFR.4 He stated, “We hope that Fannie Mae and Freddie Mac’s leadership in establishing the first major consumer loan product based on SOFR will encourage other institutions to accelerate their transition toward SOFR-based products as the end of 2021, when LIBOR is no longer guaranteed, rapidly approaches.”5
- ARRC Commends Fannie Mae and Freddie Mac’s Progress on the First SOFR-Based Consumer Loan Products [open in new window] https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/arrc-press-release-fannie-mae-freddie-mac-sofr-arms-4-13-2020.
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