The U.S. Department of Housing and Urban Development (HUD) recently issued a final rule replacing the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate (SOFR) for newly originated FHA-insured adjustable-rate forward mortgage loans and Home Equity Conversion Mortgages (HECMs), and for existing adjustable-rate forward mortgage loans and HECMs.  The final rule also establishes for HECMS with monthly rate adjustments a lifetime interest rate cap of 10 percentage points above or below the initial contract interest rate.  The final rule is effective March 31, 2023.

For newly originated adjustable-rate forward mortgage loans and annually adjusting HECMs, the acceptable indices are the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year, the 30-day average SOFR published by the Federal Reserve Bank of New York (or a successor administrator), or an alternative SOFR tenor approved by HUD (which HUD may publish by notice).  For newly originated monthly adjusting HECMS, the acceptable indices are the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year, the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one month, or an alternative SOFR index approved by HUD.

For existing forward mortgages and HECMs that use a LIBOR index, the mortgages must be transitioned to the spread-adjusted SOFR replacement index approved by HUD by the next interest rate adjustment date for the mortgage that is on or after the replacement date.  Currently, the replacement date is likely to be the first London banking day after June 30, 2023 (June 30, 2023, is likely last day on which LIBOR indices will be published and still deemed to be representative rates).

HUD will publish a Mortgagee Letter to implement the requirements of the final rule.

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