Fannie Mae (QB) (USOTC:FNMA)
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3 Months : From Jan 2020 to Apr 2020
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)
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