dhollier@imfpubs.com

Fannie Mae and Freddie Mac plan to use a new reference rate as an alternative to the London Inter-Bank Offering Rate for new originations of adjustable-rate mortgages.

The government-sponsored enterprises announced their intentions on Thursday in conjunction with the release of a white paper on the issue by the Alternative Reference Rates Committee, a private industry group convened by the Federal Reserve Board and the New York Fed.

With the possibility that LIBOR could be discontinued after 2021, AARC has been working to develop alternatives for various financial markets. Many of the alternatives are based on the newly developed Secured Overnight Financing Rate.

SOFR is already widely used to identify spreads for numerous financial products, including several securities issued by the GSEs. But, as a spot rate that can fluctuate erratically from day to day, the unadjusted SOFR is seen as a poor tool for determining payments on floating-rate instruments, like ARMs, prompting the need for some modifications.

For more details, see the new issue of Inside MBS & ABS.