On October 19, 2022, the Department of Housing and Urban Development (HUD) published a proposed rule governing the transition away from LIBOR for adjustable rate mortgages (ARMs) insured by the Federal Housing Administration (FHA). The proposal calls for use of the Structured Overnight Finance Rate (SOFR) published by the Federal Reserve Bank of New York (FRBNY).

The proposal includes:

  • Establishing the spread-adjusted SOFR set under the LIBOR Act of 2021 (the LIBOR Act) as the Secretary-approved LIBOR replacement for existing FHA-insured forward and HECM ARMs, effective on the Replacement Date as defined under the LIBOR Act
  • Approving use of the 30-day Average SOFR published by the FRBNY, while giving HUD authority to approve additional SOFR tenors through subsequent notice
  • Replacing LIBOR with SOFR as a Secretary-approved index for newly originated forward ARMs
  • Codifying the removal of LIBOR and approval of SOFR as an index for newly-originated Home Equity Conversion Mortgage (HECM or reverse mortgage) ARMs
  • Establishing a lifetime five percent interest rate cap for monthly adjustable rate HECMs

The LIBOR Act authorizes HUD to approve the spread-adjusted SOFR index, or another benchmark replacement index selected by HUD, as a replacement to LIBOR for existing FHA-insured ARMs.

Public comments on HUD’s proposed rule are due November 18, 2022.