Will All Lenders Adopt SOFR?
Last year, Freddie Mac’s adoption of SOFR as a LIBOR replacement started a trend for other lenders to follow.
“Freddie Mac’s Multifamily Division has indicated that it will begin purchasing floating-rate loans that use an index based on SOFR by November 1, 2020 at the latest, and that it will cease purchasing LIBOR-indexed floating-rate loans after December 31, 2020,” Jennifer Bojorquez, a partner at Troutman Sanders, tells GlobeSt.com. “In December 2019, it priced a new offering of Structured Pass-Through Certificates, which included a class of floating rate bonds indexed to SOFR.”
As a result, other lenders are also adopting SOFR and adjusting loan language to include SOFR. “Until recently, many lenders used generic alternate rate language in their loan documents without reference to any particular alternate interest rate benchmark,” says Bojorquez. “We now see lenders referencing SOFR as the specific alternate rate or the primary alternate rate—first in the waterfall of other alternatives—in the event LIBOR is no longer published.”
While some lenders are getting on board and transitioning, others are continuing to use standard language in their loan documents. “Other lenders do not believe that SOFR is the definitive market standard and continue to reference an unspecific alternate rate that is announced by applicable governing bodies or that is widely accepted in the market,” says Bojorquez. “Whether an alternate to SOFR emerges is yet to be seen.”
For Freddie Mac, the transition will come slowly, as it slowly phases out LIBOR. It will start by supporting the SOFR bond market. “Freddie Mac stated that its goal was to provide support to the SOFR bond market ahead of a SOFR multifamily mortgage offering and to help ease the transition away from LIBOR,” says Bojorquez. “Their announced adoption of SOFR certainly provides support for use of the index by lenders on a broader basis, and sooner rather than later.”