ARRC Recommends Libor Fallback Language for Residential ARMs

The Alternative Reference Rates Committee today issued its recommended fallback language for residential adjustable-rate mortgages that reference the London Interbank Offered Rate. While most ARMs contain language allowing the note holder to choose a new index, ARRC’s recommended language would provide greater clarity to consumers.

The fallback language covers triggers for introducing a new rates and a spread-adjusted replacement index based on the Secured Overnight Financing Rate, the ARRC’s preferred Libor replacement. Designed for voluntary use by market participants, it is the fifth set of recommended contract fallback language that ARRC has issued to help the industry transition away from Libor, which is not guaranteed to be sustained beyond 2021. Previously issued fallback language covers bilateral business loans, securitizations, syndicated loans and floating-rate notes.

In related news, Fannie Mae and Freddie Mac announced that they will use the ARRC-recommended language in new U.S. dollar-denominated, closed-end, residential ARMs. The GSEs said they would update their uniform ARM notes in the first quarter of 2020 to reflect the change. The ARRC—a group of market participants, including the American Bankers Association, that was convened by the Fed—continues to develop resources to assist financial institutions with the transition to SOFR.