Commercial and multifamily real estate finance firms are preparing for the transition away from the London Interbank Offered Rate (LIBOR), but there is little uniformity when it comes to the details, according to the results of a new survey by the Mortgage Bankers Association’s (MBA) LIBOR Outreach Committee.
LIBOR is used as the base rate for more than a trillion dollars of adjustable-rate commercial and multifamily mortgages and is potentially set to expire at the end of 2021.
“The vast majority of commercial and multifamily mortgage lenders report they are working on the transition away from LIBOR, but the devil is in the details,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Most firms are already taking some steps, including changing language in loan documents, but they also report relying on regulators and industry-bodies to make decisions before they take certain actions. The net result is a fair amount of uncertainty about the mechanics of the transition away from LIBOR, and an overall hesitation as many firms wait for others to lead the way.”
MBA’s survey of commercial and multifamily mortgage lenders found that 92 percent of respondents have begun planning for the transition away from LIBOR, and 77 percent have already adjusted LIBOR fallback language in all new loan documents. More than half – 56 percent – say they are right on track in preparing for a future without LIBOR.
When it comes to detailed plans for the transition away from LIBOR, surveyed firms’ responses are more varied. For example, less than half (41 percent) said they anticipate using the Secured Overnight Financing Rate (SOFR) as the alternative to LIBOR, while 43 percent said they don’t know what rate they will use. Less than one-third of firms (32 percent) indicated they will implement an adjustable-rate alternative to LIBOR in advance of the cessation of LIBOR, while 18 percent said they will not; 37 percent said they don’t know.
When asked if they will follow the recommendations of the Alternative Reference Rates Committee (ARRC), 59 percent said they don’t know. More than half of firms, also 59 percent, said they are relying on regulators/industry-bodies to make decisions before they take certain actions.
“With more than $1 trillion in commercial and multifamily mortgage debt tied to adjustable rate indices, the LIBOR transition has the potential to create major disruptions for borrowers, lenders, investors, and everyone in-between,” said Andrew Foster, MBA’s Director of Commercial Real Estate Finance. “MBA and its LIBOR Outreach Committee of members are developing resources to educate market participants and help ensure all stakeholders are focused on the important issues, with the goal of a smooth transition. Given all that is at stake for the commercial real estate debt markets, as well as many other asset classes that utilize LIBOR, an ounce of preparedness is worth a pound of cure.”
On Thursday, June 6, as part of its overall strategy of preparing members and consumers for the LIBOR transition, MBA will release a Single-Family LIBOR Disclosure Template, designed for lenders to share with borrowers who are considering new single-family, adjustable-rate loans. In the coming months, MBA will work to develop another disclosure template intended for consumers with existing single-family, adjustable-rate loans that are indexed to LIBOR.
Earlier this year, MBA’s Commercial/Multifamily LIBOR Outreach Committee, released a paper titled, “Primer on Evolving Issues for LIBOR Transition and Commercial Mortgage Market Challenges,” which offers key action items that member firms need to address, and identifies emerging issues to prepare for in the transition away from LIBOR. The primer and survey are part of MBA’s efforts to elevate key issues, share ideas for best practices and be an ongoing resource for the industry throughout the LIBOR transition. For more information, visit: https://www.mba.org/advocacy-and-policy/cmf-policy-issues/cref-ecosystem/libor.
MBA’s survey on LIBOR transition preparation was conducted in May 2019. Surveys were sent to 115 commercial/multifamily lenders that reported closing loans in 2018. MBA received 43 completed surveys, along with additional responses from firms that did not complete the survey because they do not make LIBOR-based loans.