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Michael G. Branson Michael G. Branson, CEO of All Reverse Mortgage, Inc., and moderator of ARLO™, has 45 years of experience in mortgage banking, with the past 20 years devoted exclusively to reverse mortgages. A Forbes Real Estate Council member, he developed the industry's first fixed-rate jumbo reverse mortgage and has been featured in Forbes, Kiplinger, the LA Times, and Yahoo Finance. (License: NMLS# 14040)
Cliff Auerswald Cliff Auerswald, President of All Reverse Mortgage, Inc., and co-creator of ARLO™ — the industry's first real-time reverse mortgage pricing engine — has 27 years of experience in mortgage banking, with 20+ years focused exclusively on reverse mortgages. A recognized expert in reverse mortgage technology and consumer education, he has been featured in Kiplinger, Yahoo Finance, Realtor.com, and HousingWire. (License: NMLS# 14041)

Reverse Mortgage Treasury (CMT) as Transitions to SOFR

Michael G. Branson, CEO of All Reverse Mortgage
By Michael G. Branson
CEO · 45 yrs in mortgage banking
Cliff Auerswald, President of All Reverse Mortgage
Edited By Cliff Auerswald
President · All Reverse Mortgage Inc.
⏱ 6 min read ✓ Fact Checked HUD-Lender #26031-0007 2 comments

Overview

With GNMA’s recent announcement, HECM ARMs using LIBOR as their index will soon not be viable to originate. While LIBOR has been destined to be phased out for some time, this unexpected announcement will require a faster transition than was expected.

The framework around SOFR, the anticipated replacement to LIBOR, has not been fully developed yet, and as such adjustable-rate HECM loans will need to use CMT (Constant Maturity Treasury)– at least in the short term.

This will be a back-to-the-future for the reverse mortgage industry. CMT-based HECM products were used in the initial ARMs. They were the only index available until the FHA added LIBOR in October 2007.



Background of the Indices

LIBOR, SOFR, and CMT represent the cost of borrowing money from a large financial institution.


LIBOR – London Inter-Bank Offer Rate 

This is a measure of the cost to Banks of borrowing cash from each other for relatively short periods. There are different LIBOR rates for different borrowing periods and different currencies.

LIBOR rates were determined by a survey of panel banks conducted by the British Bankers Association. They were not necessarily based on actual transactions.

This methodology allowed for manipulation of the LIBOR rates by large financial institutions, and as a result, regulators have mandated the phase-out of LIBOR.

 

SOFR – Secured Overnight Financing Rate 

As the name indicates, this measures the cost of borrowing cash overnight, secured by Treasuries as collateral.

It is derived from actual activity in the Treasuries repurchase (Repo) market, where banks and investors borrow or loan Treasury securities – hundreds of billions of dollars are traded daily.

The US Federal Reserve’s Alternative Reference Rates Committee (ARRC) selected SOFR as the replacement for LIBOR in June 2017.  By its very definition, SOFR is an overnight rate, so creating longer-term SOFR rates has proved problematic.

 

Treasury (CMT) – Constant Maturity Treasury 

CMT rates are designed to reflect the United States Treasury’s cost of borrowing. CMT yields are read directly from the Treasury’s daily yield curve, derived from actual yields on Treasury Securities.

Because Treasury instruments have a set maturity date and are issued according to need, it is very rare for the maturity of Treasury security to align with an exact period, e.g., Twelve Months, so interpolation ( weighted averaging) is used to determine the Constant Maturity yields. The Federal Reserve publishes CMT yields.



Why is the index changing?

The London Interbank Offered Rate, or LIBOR, reflects the average interest rate that major global banks pay to borrow money from each other.

We have known for some time that the industry sought to discontinue the LIBOR index after some banks provided purported interest rate figures that did not truly reflect the rate at which they could borrow.

After it was discovered that this index was subject to manipulation, trust in the LIBOR index as an indicator of the global economy’s health was lost.



What does this mean for you?

If you have a current reverse mortgage in process on the 1-year LIBOR ARM reverse mortgage, it will no longer be able to close after November 30, 2020.

If you are processing an adjustable rate reverse mortgage at this time, if that loan does not close by November 30, 2020, the terms will change to a 1-month CMT ARM (Constant Maturity Treasury) with a life cap of 10% instead of the current 5% life cap on the 1-year LIBOR ARM.



The Good News!

The good news is that the CMT index is extremely low and that no borrower in the history of reverse mortgages has ever reached the capped rate.  This means that the lifetime cap may be higher, but if the rates never hit the cap, the cap amount is a moot point.



Top FAQs

Q.

Is the CMT rate like the LIBOR index?

Below is a graph of the historical 12-Month rates for CMT and LIBOR since the beginning of 2010.  As you can see, the LIBOR rate has been consistently higher than the CMT rate over this period.  This largely reflects that 12 Month LIBOR rates include a credit risk component (the bank that was to borrow the funds may be unable to pay them back). In contrast, the CMT rate is based on Treasury borrowing, considered risk-free.
Q.

What will happen after you close your loan on a Treasury Index?

Even for those who close their loan under the LIBOR, you must realize that the LIBOR index is scheduled for elimination at the end of 2021.  Once the LIBOR index disappears, the loan documents for reverse mortgages and traditional loans allow lenders to substitute a new index if the index becomes unavailable.  The new index being discussed is the Secured Overnight Financing Rate (SOFR), which will be available on January 1, 2021.  The CMT is available to use today, so it allows for the uninterrupted closing of loans. In contrast, the existing closed loans utilizing the LIBOR index will likely switch to the SOFR before the end of 2021.  But make no mistake. The closed loans will also need to change their index as well.
Q.

What margins will be available; will they be the same as they are now?

The available CMT margins will remain the same as those currently available under LIBOR.  However, some of the lowest margin rates may not be offered due to the lower pricing of CMT loans.  Also, given investor focus on loans originated with an expected rate close to the floor, there will be impetus to avoid simply adding higher margins.

Q.

What will this do to short- and long-term pricing if we go to the CMT or SOFR?

Ultimately, the price the investors are willing to pay for HMBS pools determines the pricing available. The inherent difference between LIBOR and CMT or SOFR, i.e., LIBOR’s higher coupon for the same margin, results in greater interest accrual to investors, reflected by higher HMBS pricing for LIBOR loans.  However, some investors have been avoiding LIBOR investments because it is due to be retired. Increased demand from these investors would improve the relative pricing of CMT/ SOFR HECMs.
Q.

What will we use for the Jumbo LOC rate, or will it not change since LIBOR is not officially going away until next year?

Jumbo LOC will continue to use LIBOR until a suitable replacement (likely SOFR) is well-defined and broadly accepted.
Q.

What difference, if any, will this have on expected rates?

The Expected Rates used to determine PLFs are determined by the Margin of the loan + the appropriate 10yr Index. For LIBOR, this has been the 10yr LIBOR SWAP rate; for CMT, this is the 10yr CMT rate, as published by the Federal Reserve Bank.  The chart below shows that the 10yr LIBOR swap and 10yr CMT rates have been very similar for the last 10 years.
Q.

How will CMT impact initial rates vs LIBOR rates?

Initial Rates will be lower for the same margin.  For example, currently, 12 Month LIBOR 0.37% v 12 Month CMT 0.12%, so for a loan with a 2.5% margin, the initial rate for the CMT product will be 2.62%, whereas the LIBOR would be 2.87%.  This more attractive Initial Rate should be a focus with consumers.

CMT vs LIBOR Index past 12 months

Currently 12 Month LIBOR 0.37% v 12 Month CMT 0.12%




CMT Index VS 12 Month Libor

Currently, 10 Year LIBOR Swap 0.68% v 10 Year CMT 0.67%.




10-Year Treasury Rate History (CMT)

10-year Treasury Rate History
Rate (%)Good ThroughModified On
1.663/29/20213/22/2021
1.573/22/20213/15/2021
1.493/15/20213/8/2021
1.423/8/20213/1/2021
1.313/1/20212/22/2021
1.182/22/20212/16/2021
1.142/16/20212/8/2021
1.062/8/20212/1/2021
1.112/1/20211/25/2021
1.131/25/20211/19/2021
1.031/19/20211/11/2021
0.941/11/20211/4/2021
0.951/4/202112/28/2020
0.9312/28/202012/21/2020
0.9312/21/202012/14/2020
0.9212/14/202012/7/2020
0.8712/7/202011/30/2020
0.8711/30/202011/23/2020
0.9311/23/202011/16/2020
0.8311/16/202011/9/2020
0.8211/9/202011/2/2020
0.8311/2/202010/26/2020
0.7410/26/202010/19/2020
0.7810/19/202010/13/2020
The 10-year treasury index is added to the HECM margin to arrive at the lenders "expected rate". Lenders use the expected rate as a qualifying rate which directly affects the amount of funds available to you. The higher the expected rate, the lower the proceeds become available.

1-Month Treasury Rate History (CMT)

1-Month Treasury Rate History
Rate (%)Good ThroughModified On
0.013/29/20213/22/2021
0.043/22/20213/15/2021
0.043/15/20213/8/2021
0.033/8/20213/1/2021
0.033/1/20212/22/2021
0.042/22/20212/16/2021
0.042/16/20212/8/2021
0.062/8/20212/1/2021
0.072/1/20211/25/2021
0.091/25/20211/19/2021
0.091/19/20211/11/2021
0.081/11/20211/4/2021
0.081/4/202112/28/2020
0.0812/28/202012/21/2020
0.0812/21/202012/14/2020
0.0712/14/202012/7/2020
0.0812/7/202011/30/2020
0.0811/30/202011/23/2020
0.111/23/202011/16/2020
0.0911/16/202011/9/2020
0.0811/9/202011/2/2020
0.0811/2/202010/26/2020
0.110/26/202010/19/2020
0.0910/19/202010/13/2020
To arrive at your fully indexed note rate take the index value and add to the lender margin.

1-Year Treasury Rate History (CMT)

1-year Treasury Rate History
Rate (%)Good ThroughModified On
0.073/29/20213/22/2021
0.093/22/20213/15/2021
0.083/15/20213/8/2021
0.083/8/20213/1/2021
0.073/1/20212/22/2021
0.072/22/20212/16/2021
0.072/16/20212/8/2021
0.092/8/20212/1/2021
0.12/1/20211/25/2021
0.111/25/20211/19/2021
0.11/19/20211/11/2021
0.111/11/20211/4/2021
0.091/4/202112/28/2020
0.0912/28/202012/21/2020
0.112/21/202012/14/2020
0.1112/14/202012/7/2020
0.1112/7/202011/30/2020
0.1111/30/202011/23/2020
0.1211/23/202011/16/2020
0.1311/16/202011/9/2020
0.1211/9/202011/2/2020
0.1311/2/202010/26/2020
0.1310/26/202010/19/2020
0.1310/19/202010/13/2020
To arrive at your fully indexed note rate take the index value and add to the lender margin.

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Michael G. Branson CEO, All Reverse Mortgage, Inc. and moderator of ARLO™ has 45 years of experience in the mortgage banking industry. He has devoted the past 20 years to reverse mortgages exclusively.

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2 Comments on this Article
  1.   Herman A.
    November 11th, 2020
    What determines the Principal Limit for a Reverse Mortgage loan?
    Reply to Herman
    • Michael Branson Michael Branson
      November 12th, 2020
      It depends on the program.
      On the HUD HECM, HUD determines the Principal Limits based on their published factors.
      On the private or proprietary programs, the private investors set their own parameters.
      HUD uses a number of factors to determine the actual Principal Limit that borrowers will receive based on a table that takes into consideration the age of the youngest borrower or eligible non-borrowing spouse on the loan, the value of the home or the maximum lending limit, whichever is lower (currently the maximum HUD lending limit is at $765,600), and current interest rates.
      Once all the factors are loaded into a calculator, the Principal Limit is determined for each loan. HUD posts their Principal Limit factors on a table on their website at https://www.hud.gov/program_offices/housing/sfh/hecm.
      For example, if you have a 62-year-old borrower with a home at or below the maximum lending limit, and the Expected Interest Rate is 3%, the Principal Limit would be 52.4% of the value of the home.
      3% is the "floor rate" for HUD which means that any rate below that will yield the same results but rates above the floor would begin to lower the Principal Limit factor and the higher they go, the more severely the drop in funds to the borrower.
      In this same example, at a 4% Expected Interest Rate, the Principal Limit Factor would be reduced to 47%.
      To throw a curve into this, if the property value was $850,000, the percentage would be based on the lower of the property value or the HUD Lending Limit whichever was lower and in this case, the HUD Lending limit of $765,600 is lower than $850,000 so the 52.4% would be based off of the $765,600, not the $850,000 for the 3% rate.
      Private investors set their own Principal Limit Factors for their programs.
      When there was just one private program available nationwide, the loans were very restrictive.
      Now that there are several options available, competition in the marketplace has been very good for borrowers as investors are forced to compete with other investors to attract borrowers to their products.
      These programs do tend to change more so than the HUD HECM and it is always a good idea for borrowers to get multiple quotes on all loans, both the HUD program and the private or jumbo products to compare between programs and lenders.
      Reply to Michael

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