Fannie Mae, Freddie Mac to Stop Accepting Libor Mortgages
February 06 2020 - 2:29PM
Dow Jones News
By Julia-Ambra Verlaine
Fannie Mae and Freddie Mac said they will stop accepting
adjustable-rate mortgages tied to the London interbank offered rate
by the end of 2020, a boost for the Federal Reserve's preferred
replacement to the troubled short-term interest benchmark.
The housing-finance giants also said they will soon accept
mortgages based on the secured overnight financing rate, or SOFR,
an alternative rate created by a Fed committee of regulators, banks
and asset managers. The push to bring the new mortgages to market
could force other participants -- from mortgage brokers to banks
and servicing companies -- to prepare for the expected end of a
benchmark that has been built into the financial system for
decades.
Libor touches over $200 trillion in financial products, ranging
from interest-rate swaps to corporate loans and credit cards. About
$1.2 trillion of U.S. mortgage debt is linked to the Libor rate,
according to the New York Fed, making it the largest segment of
consumer debt affected by the transition.
"This is the first major announcement of a consumer-loan product
based on SOFR and will help lenders transition a trillion-dollar
market away from Libor," said Tom Wipf, a Morgan Stanley banker who
also leads the financial-industry group known as the Alternative
Reference Rates Committee, or ARRC.
The announcement, released Wednesday, underscores recent
progress in efforts by Wall Street and regulators to move away from
Libor, which was scheduled for replacement after a manipulation
scandal. This week, Treasury Department officials said they are
considering the possibility of issuing a new floating-rate note
linked to SOFR.
The benchmark was designed to be more reliable than Libor. While
Libor is derived from estimates of what it costs banks to borrow
from one another over different short-term periods, SOFR is based
on the cost of transactions in the market for overnight repurchase
agreements, or repos. That is where financial companies borrow cash
overnight using U.S. government debt as collateral.
Fannie and Freddie were among the members of the Fed's
committee. The government-sponsored entities buttress the U.S.
mortgage market by purchasing loans from banks and other lenders,
which they package, sell to investors, and then guarantee payments
on. The decision to no longer accept Libor mortgages pushes lenders
to revise their infrastructure to accommodate new debt.
"Authorities from around the world have warned of the need to
transition away from Libor and firms should heed these statements,"
said Randal Quarles, the Federal Reserve vice chairman in charge of
financial regulation.
Progress is advancing in the derivatives markets, where about
$190 trillion of contracts are linked to Libor, according to the
Federal Reserve Bank of New York. In January, the CME Group began
to offer options on SOFR interest-rate futures, and investors and
banks such as JPMorgan Chase & Co. started trading complex
derivatives.
The yield on the benchmark 10-year Treasury traded little
changed at 1.64% Thursday, according to Tradeweb. The WSJ Dollar
Index was recently at 91.32.
Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com
(END) Dow Jones Newswires
February 06, 2020 14:14 ET (19:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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