Not all lenders are equally prepared for LIBOR change

Commercial, multifamily firms have varying degrees of readiness

Not all lenders are equally prepared for LIBOR change

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.

Randal Quarles, the Fed’s vice chairman for banking supervision said Monday that although no date has been set for the transition, lenders should be taking action.

“Beginning that transition now would be consistent with prudent risk management and the duty that you owe to your shareholders and clients,” Quarles said.

But the Mortgage Bankers Association’s LIBOR Outreach Committee has surveyed commercial and multifamily firms and found that not all are working towards the change at the same pace.

"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.”

That means 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.

The survey found that:

  • 92% of respondents have begun planning for the transition away from LIBOR
  • 77% have already adjusted LIBOR fallback language in all new loan documents
  • 56% say they are right on track in preparing for a future without LIBOR

But when it comes to detailed plans for LIBOR transition:

  • 41% said they anticipate using the Secured Overnight Financing Rate (SOFR) as the alternative to LIBOR
  • 43% said they don't know what rate they will use
  • 32% indicated they will implement an adjustable-rate alternative to LIBOR in advance of the cessation of LIBOR, 18% said they will not; 37% said they don't know

"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."

MBA template

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, on June 6; further resources will follow in the coming months.