ARRC Releases White Paper on Using SOFR Average for ARM Products

The Alternative Reference Rates Committee yesterday released a white paper that shows how to use an average of the Secured Overnight Financing Rate to structure adjustable-rate mortgages in a way that’s comparable to current ARM loans.

Developed by the ARRC’s Consumer Products Working Group, the white paper demonstrates one of the ways to avoid subjecting consumers to the risks inherent in Libor. The SOFR-indexed ARM would reference an average of SOFR calculated prior to the reset date, which would be set at a frequency of six months, with rate caps adjusted accordingly.

Fannie Mae and Freddie Mac issued statements of support for the white paper and indicated they would work to transition lenders and borrowers to SOFR-based ARMs by the end of 2021.