'Phantom' LIBOR seen besetting U.S. mortgage industry

Peter D. Antonoplos

Washington D.C., May 22, 2019 – Industry officials predict that the U.S. mortgage industry will likely have to grapple with a “phantom” version of the world’s most important number—London interbank offered rate (LIBOR)—as soon as 2021 when the rate will be phased out of everyday financial calculations.

LIBOR is a rate index for $350 trillion of U.S. financial products, mainly aimed at rate derivatives. With over $1 trillion worth of adjustable-rate home loans reset against this index, it is imperative that financial institutions prepare for the collapse of this preferred instrument.

 A senior advisor at Freddie Mac, used the Year 2000 computer flaw as a point of reference when describing the worldwide turn from the index “People are starting to feel the burn.”

The Alternative Reference Rates Committee (ARRC), a financial industry group backed by the Federal Reserve and other government agencies, created a list of possible reference rates and their corresponding guidelines that banks and other financial institutions should adopt in order smooth out the transition when leaving the LIBOR ecosystem.

Another market analyst committed on the issue, conveying that while there are plenty of issues associated with moving away from LIBOR for large banks, this process is even more daunting for smaller banks who are consistently one to two years behind large loan offering institutions.

The Secured Overnight Financing Rate (SOFR) is the preferred index for the ARRC as it is collateralized by U.S. Securities which make the marker more accurate and stable when gauging broad American markets.  However, the acceptance of SOFR among banks, corporate borrowers and asset managers has been slow due to issues with software integration that has only now started to be created by companies such as Finastra.

Market pushback has also occurred in relation to the adoption of SOFR as this index focuses on overnight risk-free rates whereas LIBOR gauges the borrowing costs that exist between banks. With a current lack of term market prediction, SOFR’s acceptance is again questioned by individuals or institutions who seek to gauge the risk associated with interest rates for loans that will continue to exist 30 years from now.

Finally, financial executives question what reference rate their institutions will use for outstanding LIBOR-based loans after the index is discontinued in 2021.

Since 2017 when the issue first arose, the ARRC has begun to recommend “fallback” language about using a comparable indexs instead of LIBOR for existing rates that continue past 2021.

Finally, a member Fannie Mae’s senior management team furthered the discussion concerning legacy LIBOR-based loans and voiced concerns especially if a comparable and industry accepted index does not come to fruition by 2021.

According to this source, if the aforementioned scenario were to occur, a “phantom” LIBOR would begin to exist and support these legacy products even though the index would cease to be an accurate measure for borrowing costs, thus leading the financial industry into a dangerous tailspin.

The Antonoplos & Associates financial services branch provides our diverse base of banking clients with a comprehensive range of solutions for LIBOR loan related legal issues. Our LIBOR practice provides the banking industry with over twenty years of client focused practice in title litigation, loan modification, title curation and equitable subrogation resolutions in connection with loan portfolios.  By striving to holistically understand the issues that our clients face, our financial services attorneys’ are able to provide forward thinking loan documentation and amendments through title curative actions including the correction of legal description errors, resolution by judicial action, equitable subrogation, and securing releases of prior liens, mortgages, and deeds of trust while also prescribing remedies for corrections to promissory notes and deeds of trust. 

Antonoplos & Associates financial services lawyers routinely litigate equitable subrogation matters on behalf of nationally and locally chartered banks. Our clients include mortgage lenders, mortgage servicers, banks, banking associations, and other financial institutions including the title insurance industry. Overall, our LIBOR attorneys’ have extensive experience representing loan portfolios and managing multi-jurisdiction loan modifications and litigation for clients located within the financial services industry.
Peter D. Antonoplos, Esq.Partner
Antonoplos & Associates, Attorneys At Law
1725 Desales Street, N.W.Suite 600,
Washington, D.C. 20036
Fax:    (202)-803-5677
Email: Peter@