Variable Rate Reverse Mortgages: What You Need to Know About Recent Changes

Understanding the Transition from the LIBOR Index
to the CMT Index

Changes to How Interest Rates are Calculated

In late September 2020, the federal agency Ginnie Mae (GNMA), which guarantees Home Equity Conversion Mortgages (HECM), more commonly known as reverse mortgages, announced that it will no longer allow the LIBOR index on HECM adjustable rate loans effective December 1, 2020.

Historically the index used on variable rate reverse mortgages have been based on the LIBOR Index (London Interbank Offered Rate) but the index will change to the Constant Maturity Treasury (CMT) this winter. We will update this information as new developments unfold. 

Update 12/18/20: GNMA has issued a 60-day delay and the LIBOR phase-out on HECM adjustable rate loans has shifted from December 1, 2020 to February 1, 2021.

Frequently Asked Questions About the Transition to the CMT Index

Let’s review how interest rates on reverse mortgages are calculated. With adjustable rate mortgages or ARMs, interest rates are made up of two parts: an index and the margin set by the lender. 

  • If the index changes, mostly likely the interest rate will also change.
  • You are charged interest only on the proceeds that you receive from your loan.
  • Interest payments are deferred to the end of the life of the loan.

The reverse mortgage industry, including RMF, will begin to use the Constant Maturity Treasury (CMT) index to calculate interest versus the LIBOR index. As early as October, the index used on most new RMF variable rate HECM loan applications will be based on CMT Mortgage Index. Please contact your loan originator for more specific information.

Its best to begin by understanding the differences between CMT vs LIBOR. As you can see from the chart below, the CMT and LIBOR indices closely track one another and that’s a good thing! This means the impact to borrowers is minimal – interest rates and available loan proceeds between CMT and LIBOR loans closely track one another.

LIBOR CMT Comparison

In September 2020, the federal agency Ginnie Mae (GNMA), which guarantees Home Equity Conversion Mortgage (HECM) loans in the secondary market, announced that it will no longer allow LIBOR as an index on HECM loans effective February 1, 2021. In its place, the CMT Index will be replacing the LIBOR index.

  • The Federal Housing Administration (FHA)*, will only insure HECMs based on either the Constant Maturity Treasury (CMT) or LIBOR. As a result, the industry will begin its transition to CMT immediately.
  • Given that the London Interbank Offered Rate (LIBOR) index is being discontinued, reverse mortgage lenders will no longer use the LIBOR index to determine interest rates for adjustable rate mortgages (ARM).

The Financial Conduct Authority (FCA), the British regulator of LIBOR, and other U.S. government regulators have warned that publication of LIBOR is not guaranteed beyond 2021.

  • Financial regulators decided there needed to be a new index option, and preparations have been underway to find an alternative to the LIBOR rate for several years.
  • In 2014, the U.S. Federal Reserve Board and the Federal Reserve Bank of New York created the Alternative Rates Reference Committee (ARRC) in order to review potential replacements for LIBOR.
  • Since 2017, ARRC made its recommendation and other financial institutions and government agencies, such as those that govern reverse mortgages, have been working to identify alternative indices to replace the LIBOR.
  • In late September 2020, in order to prepare for the cessation of LIBOR, the federal agency Ginnie Mae, which guarantees HECM loans in the secondary market, announced to the reverse mortgage industry that it will no longer allow LIBOR as an index on HECM loans effectively on or after February 1, 2021. However, the federal regulator will permit the use of the CMT (known as Constant Maturity Treasury) as an index on HECM.
  • Considering that, the index we will use to determine the interest rate on HECM ARMs is transitioning away from LIBOR.

LIBOR has been the globally accepted key benchmark interest rate used in a wide variety of products, including reverse mortgage interest rates. LIBOR is based on the average interest rate a group of leading global banks estimate they would use to borrow from one another. Mortgage lenders would then use that to calculate the rate that would apply to a borrower’s mortgage.

CMT is commonly known as the Constant Maturity Treasury.

  • Financial regulators decided there needed to be a new index option, and preparations have been underway to find an alternative to the LIBOR rate for several years.
  • According to Investopedia, “Constant maturity yields are often used by lenders to determine mortgage rates. The one-year constant maturity Treasury index is one of the most widely used, and is mainly used as a reference point for adjustable-rate mortgages (ARMs) whose rates are adjusted annually.”
  • As of February 2021, HECM ARM interest rates will be based on the weekly average yield on United States Treasury securities adjusted to a constant maturity of 1 year (which we call CMT), plus a margin established by the lender.
  • The Index is published in the:
    • Federal Reserve Board’s Data Download Program (DDP) and made available by the Board of Governors of the Federal Reserve System in Statistical Release H.15.
    • Information about the CMT index rate also is published in the Wall Street Journal.
  • Your reverse mortgage interest rate will equal the CMT index rate plus a margin and will be subject to interest rate “caps” that limit the amount of change in the interest rate.

The key date for LIBOR transition is the end of 2021. However, for regulatory and industry reasons, some market participants will stop using LIBOR mid to late October 2021. 

As we get closer to the end of LIBOR, RMF and other members of the reverse mortgage industry are making the transition from October to December 2020. For information about a specific application, contact your loan specialist or call 877-371-1018. 

The impact of this transition will depend on your application date. Please contact your loan originator for more information.

If your HECM ARM loan does not fund by the internal RMF December 2020 cutoff, then your RMF loan specialist will need to redisclose and reprice your loan using the new index. Your loan specialist can walk you through this process and he/she will communicate all the details.

Additionally, we want to make sure your new CMT quote closely mirrors your original LIBOR-based loan. Your loan will be priced out to match your original principal limit. Additionally, we'll endeavor to have your closing costs match what was quoted in the original quote.

Just a reminder, historically, LIBOR vs CMT index closely mirror one another. Over a ten-year period, the indices are close. In fact, the rates for the CMT have been lower during this time frame.

LIBOR CMT Comparison

If you do not want to close a ARM reverse mortgage with the CMT as the index, then you could choose a fixed rate reverse mortgage option or RMF’s Equity Elite® product (based on state availability). For information about a specific application, contact your loan specialist or call 877-371-1018.

As of now, HECM ARM mortgages that closed before November 2020 with the LIBOR index and Equity Elite® product ARM applications and mortgages will remain unaffected by the transition to the CMT in 2020. Please contact your loan specialist, loan servicer or call 877-371-1018 for more information.

For more information, below are additional resources on alternative reference rates and the LIBOR transition.

Please note that these resources are not affiliated with RMF, and these materials are provided for general information and educational purposes only.

Reverse Mortgage Funding LLC is Here to Help You Through the Transition

RMF has taken several steps to build its transition, including implementing operational, infrastructural, and reverse mortgage interest rate changes. To manage this change, we have subject matter experts in multiple areas to assist with a successful transition. Company representatives participate in regulatory and industry groups and committees related to the LIBOR transition to the CMT index.

As our customer, it is important for us to know that you understand this global market change and its impact on you, so we have multiple efforts to ensure that we provide you with the latest developments and information that you need. Most importantly, we continue to listen to our consumers and their concerns.

RMF is committed to helping consumers understand and navigate this global market change as smoothly as possible. RMF will continue to provide you with helpful resources that will aid in transition efforts as 2020 and 2021 unfold. If you have any questions relating to the interest rate index transition, please contact your loan originator about your specific application or call RMF directly at 877-371-1018 for more general information.

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