July 17, 2019 / 9:48 PM / a month ago

Fannie, Freddie to eventually end buying of LIBOR mortgages: FHFA's Calabria

NEW YORK (Reuters) - Fannie Mae and Freddie Mac will eventually halt purchases of U.S. home loans linked to the London interbank offered rate (LIBOR) as that index is set to be phased out after 2021, Mark Calabria, the head of the Federal Housing Finance Agency, told Reuters on Wednesday.

LIBOR is referenced against $200 trillion worth of U.S. financial products, primarily in interest rate derivatives. There are roughly $1 trillion in adjustable-rate mortgages (ARMs), or about 6.5% of all U.S. home loans outstanding, which are reset against it.

“We have not yet told Fannie and Freddie to stop buying LIBOR ARMs, but that is a day that will come,” FHFA director Mark Calabria told Reuters. “We are trying to minimize risk going forward.”

Regulators have been urging the financial industry to shift from LIBOR, which has been tainted by a rigging scandal, to alternatives, such as the Secured Overnight Financing Rate (SOFR) in the United States.

They are worried about possible market disruptions if banks, lenders and investors are not prepared when LIBOR ceases to exist about 1-1/2 years from now.

“We need a mindset shift where firms realize that every new U.S. dollar Libor contract written digs a deeper hole that will be harder to climb out of,” New York Federal Reserve President John Williams said an industry event on Monday.

The Alternative Reference Rates Committee’s consumer products working group last week issued a “white paper” on the adaption of SOFR by the U.S. mortgage market.

Calabria also said there needs to be increased effort to educate consumers about this move from LIBOR.

“We just need to get some education on this,” he said, adding: “I don’t want to wake up one day and have millions of mortgage borrowers feel like that they were hoodwinked or they were sold something” they did not understand.

(GRAPHIC - SOFR vs LIBOR: tmsnrt.rs/2NRm2Hs)

Reporting by Richard Leong; editing by Richard Chang and G Crosse

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