Blog Post

FROM LIBOR TO SOFR (WHAT THE HECK???) EXPLAINED IN PLAIN ENGLISH

Deana M. Devereaux • November 25, 2020

You probably saw this title and was like:

We will do this in a Q& A fashion, to make things easy…in plain ENGLISH.


What is LIBOR?

LIBOR is the London Interbank Offered Rate. This is an interest rate average, or primary benchmark reference that Lenders, Banks and other Financial Institutions use to determine interest rates for things like your real estate mortgages, credit cards, student loans, corporate loans, bonds and more.

What is the point of this post?

LIBOR is going away, supposedly, at the end of 2021. The process to phase it out has already begun.  Realistically, LIBOR probably won’t be completely phased out in 2021, because of the worsening pandemic. LIFE is slower, in general since COVID-19 hit. Anyone else notice how we blinked…and went from Valentine’s Day to Halloween this year, like only a week had passed?

There really is no concrete ETR (estimated time of replacement) set yet…and honestly, the transition could go well into 2022. As with ANY major transition, there are going to be kinks that need working out.


Why is LIBOR going away?

SOFR.


What is SOFR?

SOFR is the Secured Overnight Financing Rate. It was chosen by the ARRC (Alternative Reference Rates Committee) as the recommended alternative to LIBOR. The transition is supervised by the AARRC of the Federal Reserve Board and New York Fed (Federal Reserve Bank of New York).


WHY SOFR instead of LIBOR?

SOFR is a nearly risk-free reference rate. Unlike LIBOR, SOFR is based on actual market transactions, observable prices in the market, is SECURED and is less susceptible to market manipulation. LIBOR is an UNSECURED, forward-looking term rate, determined by what banks would charge each other to borrow. Banks were asked to estimate the rate at which they COULD borrow from other banks, not rates at which they ACTUALLY borrowed.

Can you say “Manipulation”, boys and girls? Bankers were manipulating the rate right after the Great Recession.

SOFR is based on transactions in the Treasury repurchase market and is seen as preferable to LIBOR since it is based on data from observable transactions rather than on estimated borrowing rates.


Um…the transition is NOT going to be easy, is it?

#Nopenopenope

This is not going to be a cakewalk. There is about $200 trillion in outstanding LIBOR contracts and debt. LIBOR has 35 different rates and is all about unsecured loans. SOFR publishes just one rate based exclusively on overnight loans, is risk-free and is all about secured loans backed by T-bonds (Treasury bonds, which are risk free, fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years.).

Repricing contracts is going to be hairy. What will the fallback provisions entail? These are the sections of a loan agreement that describes what happens if LIBOR is no longer available.

 The shift to SOFR will affect derivatives (securitized contracts) consumer credit products (like adjustable rate mortgages, or ARMs) private student loans and commercial paper.


What EXACTLY does the switch to SOFR mean for me?

Nothing, if you don’t have an adjustable-rate loan. The combo of super low rates and pandemic uncertainty have borrowers focused on FIXED-rate mortgages. Unless you are an investor, where a 3 to 7-year loan term would work for investment property goals, why WOULDN’T you want a 30-year fixed at a possible 2.75%?


What do I need to dooooo?

If you have an ARM, a reverse mortgage, or a home equity loan, read the FINE PRINT. Is it already SOFR or Treasury based, or is it LIBOR-based?

If it is LIBOR-based, call your Servicer/Lender and ask when they will shift to SOFR and what that change will mean for you.


What is the real fallout of this switch?

Mortgage rates could possibly increase if rate swaps become more expensive for banks. Some borrowers could possibly get charged more…it all will depend. There is still a LOT left to be deciphered.

You may also get that postcard in the mail one day. SOMEBODY is going to claim they were wronged in this. It is inevitable.

You know the infamous class-action lawsuit postcard, where the suit amount is for double-digit millions of dollars….and you smile from ear-to-ear, thinking you are about to get a DECENT-sized check….


...but you receive that $6 check in the mail 8 months later?


Bottom line?



Ready or not, LIBOR’s a leavin’ and SOFR’s a comin’.



We’ll keep you posted.


CHECK OUT SOME OF OUR RECENT BLOG POSTS

AFFECTING THE MORTGAGE INDUSTRY? NEW LAWS 2022

By DEANA M. DEVEREAUX • June 21, 2022
It’s important to stay up to date on the ever-changing landscape that is the mortgage industry. It’s possible that the newest laws passed by congress, Fannie Mae, and Freddie Mac could affect those looking to get a mortgage, or refinance in the coming months. We’ve put together all the latest on the newest and upcoming mortgage laws affecting the industry. Additional due diligence for condo buyers If you’re looking at buying a condo that is 20 years or older, you may have to jump through a few extra hoops before signing the final loan docs. Conventional loan buyers will have to go through an additional due diligence process that includes obtaining answers on safety, soundness, structural integrity, and habitability of condos from the condo association before the loan can be processed. If you’re looking at a condo this spring, it’s best to get prepared now. While this extra due diligence step is a pain, it’s in your and your lenders best interest. This extra due diligence step was born out of the devastation of recent condo building collapses in the U.S. New fees for vacation home financing and high-balance loans If you thought 2022 was the year for. A second home, vacation home or jumbo upgrade, it may still be but you’re going to be looking at additional fees. Upfront fees for these types of loans are expected to increase between 1.125 percent to 3.875 percent. Fannie Mae and Freddie Mac explain that these increases in the second home market are to keep first-time homeownership rates low and facilitate equitable and affordable housing. You can still buy down these increases with points just like you can buy down an interest rate. This rate increase comes as we saw the housing market skyrocket and borrowers take on additional debt to compete in this hot market. Self-employed borrowers rejoice – loosened regulations Thanks to the pandemic, the number of freelanced workers has increased. The good news keeps on coming because lending criteria has relaxed for self-employed borrowers. The COVID-19 pandemic saw an increase in requirements for self-employed borrowers. If you’re a freelancer, you no longer need to provide year-to-date profit and loss statements and three months of bank statements. We’re back to the good old days of using tax returns to show income! If you’ve been waiting to buy a home because you’re a self-employed borrower, now is the time! In the past, borrowers had to show creditworthiness through any number of on time loan payments including credit cards, first mortgage loans, car loans and more. The strict creditworthiness requirement affected many buyers that did not have credit cards, mortgage loans, or car loans. Now your mortgage loan provider can use a verification tool to check bank deposits for on-time rental payments, and other creditworthiness information. Say goodbye to mounds and mounds of paperwork proving you pay your loans on time!

DO YOU REALLY NEED A REAL ESTATE AGENT?

By Deana M. Devereaux • June 14, 2022
 The real estate agent that you’re working with to buy your home should be your advocate. You want to ensure that they are aware of all risks and benefits associated with the property you’re looking to buy. There is a major benefit in having a good real estate agent because they can ultimately help you make money on the purchase of your home in the long run. If your agent shows you homes where you could add an additional bedroom or bathroom or they show a property where you could finish the basement, they’re helping you gain equity in the property. On the flip side of that, if they don't understand your search area and they show you a home that is overpriced and they suggest that you go in over the true value of that home, you’re losing money on the transaction. It’s important to work with someone that you trust to guide you through the process and help you make decisions that will help your bottom line, not hurt it.

THE INS AND OUTS OF FINANCING A 2ND HOME

By DEANA M. DEVEREAUX • May 23, 2022
Step 1 – Decide How You’re Going to Use the Second Home Your down payment requirements and loan types will differ depending on what you plan to use your second property for. For example, do you plan to use it as a vacation home, secondary residence, or full-time rental property? A vacation home or secondary residence may qualify for a conventional home loan. When qualifying for a second conventional loan, the process is much like your first mortgage except you will be required to put down 10 percent. If you are purchasing the home to use as an investment property or full-time rental, you won’t qualify for certain loan types such as FHA or VA loans. You will also be required to put down a larger down payment than a vacation home or secondary residence. In addition, you may have to meet stricter debt to income ration requirements. All hope is not lost though! You can still qualify for a vacation home or secondary residence if you plan to rent the home out on apps like Airbnb. Typically, you must occupy the home for some portion of the year, and the home must be a one-unit home that can be used year-round. We can help you figure out what loan type you qualify for. Step 2 – Save For Your Down Payment There are multiple ways to complete this step. You can save the traditional way and put away a portion of your paycheck every month. You can also use the equity in your primary home to fund the down payment of your second home. There are multiple programs available such as: · Cash out refinance: A cash out refinance allows borrowers to borrow up to 80% of their home’s current value. The only caveat with this option is that your primary home’s monthly payment will increase. · HELOC: A HELOC, otherwise known as a Home Equity Li ne of Credit. This avenue differs from a cash out refinance because you are not refinancing your primary home’s mortgage. This is a good option if current interest rates are higher than your primary home mortgage interest rate. The last thing you want to do is refinance to a higher interest rate!
Show More

Please Share!

Share by: