I have an adjustable rate mortgage based on LIBOR and the lender still has not said what they plan to do. The presumed replacement rate (SOFR) seems to be pegged near 0% which would be good.
If you're in the US and the mortgage is dollar-based I would expect you to be transitioned to a SOFR-based loan, possibly with a credit adjustment spread.
In my previous job we sold LIBOR (and Euribor) mortgages, so I have been wondering what the lender would do about those, since as I understand it the LIBOR element was written into the 25+ year mortgage contracts. I guess I found out - nothing!
Note that when SOFR starts to fluctuate, you wont know your actual interest payment before the end of each payment period, since these rates are applied on a daily basis, in arrears.
CME Term SOFR contracts exist to address this. 1M, 3M, 6M, and 1Y Term SOFR rates are published [1]. A typical 3M LIBOR contract can just substitute it with 3M SOFR without impacting the basic mechanisms, like knowing in advance how much interest you will owe over the next period.
That's not how mortgages work, at least in the US.
There's a limit to how often the rate changes, etc.
Just looking at one now, and it's set up as follows:
1. Rate is allowed to change only on the 1st day of every 6th month (after the initial flat-rate period ends).
2. On that day, the new rate is set to a spread + the max of 0 and the value of the 30-day Average SOFR Index (as published by the NY Fed) as of 45 days before the day when the rate is changing.
Not quite - legally it's whatever is in the agreement and those have been (and still will be) subject to negotiation. In credit agreements without replacement language (e.g., pre 2018 agreements), a Borrower may very well be forced to borrower in prime, for instance.
What you're talking about is the credit spread adjustments from the ARRC formulation of the LIBOR replacement language (11.448 bps for 1 month, 26.161 bps for 3 months and 42.826 bps for 6 months) [0]. In reality, the credit spread adjustments for Term SOFR are still moving and the market has been all over the place - I've seen 10/15/25 bps at 1mo/3mo/6mo tenors (the most common formulation in the leveraged space right now) or a 10 bps flat adjustment (generally viewed as aggressive).
Completely tangentially related: I love basis points. Up until I started working in the FinTech I could not grasp the need for it... but after much repeating "x% plus 3%" and then having to clarify that is 300 basis points and not x*1.03, it got my eyes opened.
It's also useful for negotiating rates. Saying you want a rate to be .2% lower is awkward and wordy. Saying 'can we take it down 20 bips?' sounds much more pro ;).
26bps was the recommended adjustment based on historical analysis at the time. The actual spread in the market is not a constant, and has been below 26bps for a long time. The current LIBOR-SOFR spread is around 12bps. It's all negotiated, so people who earn interest are arguing it should be 26bps and people who pay interest are arguing it should be 12 bps. The market seem to be settling on 3M LIBOR = 3M SOFR + 15-20bps.
Why is this purely up to the lender? And if it is, of course they'll add something. You can't have individuals borrowing money interest free now, can we? (Institutions...that's more than fine, its expected.)
It's not "purely up to the lender." It's agreed upon in a mortgage contract, which the borrower signed. Both parties decided that it was a good idea, otherwise there wouldn't have been an agreement.
