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Secured Overnight Financing Rate
(SOFR), is based on closed transactions in the Treasury repurchase (repo)
market, where money trading happens daily. A repurchase agreement (RP) is a short-term loan where both parties (banks-lenders-
financial corporations) agree to the sale and a future repurchase of assets
within a specified contract period. The seller sells a Treasury bill or other
government security with a promise to buy it back at a specific date and at a
price that includes an interest payment. This is the market where
investors offer borrowers overnight loans backed by their U.S. Treasury bond
assets. It is a clearing house for cash where the rate of repayment is agreed
upon. The SOFR is now considered the better way to view the American economic cash
flow and rate of return on a daily basis that is averaged monthly.
COFI index became outdated as banks
merged, fewer participants allowed for real market measure as the few big banks
could control the index. The Federal Home Loan Bank of San Francisco will discontinue
the three Eleventh District Weighted Average Cost of Funds indexes after the
publication of the December 2021 COFI on January 31, 2022. The FHLB will no
longer calculate the Semiannual Weighted Average Cost of Funds Indices for the
11th District and for California after the publication of the indices for the
July-December 2021 period on February 15, 2022. COFI index was used for most Adjustable Rate
Mortgage loans prior to 2009. Lenders and servicers already began transitioning
Adjustable Rate Mortgages to LIBOR some years past. Now we will see them roll
to SOFR indexes.
London Inter-Bank Offered Rate – the index used to set many
adjustable mortgage rates Due to interest rate manipulation stemming back to as early
as 2003, LIBOR will be discontinued, on December 31, 2021. Approximately
$350 trillion worth of financial contracts reference LIBOR globally. Lookup
LIBOR scandal to see how Deutsche
Bank (DB), Barclays (BCS), Citigroup (C), JPMorgan Chase (JPM), and the Royal Bank of Scotland (RBS) cooperated to control the index from 2003 to 2012.
SOFR
has been selected by Fannie Mae and Freddie Mac its preferred alternate index
for mortgage contracts sold to them starting next month.
SOFR
ARMs eligible for sale to Freddie Mac and Fannie Mae will use an index based on
a 30-day compounded average of SOFR (SOFR Index). The Federal Reserve Bank of
New York (New York Fed) publishes 30-, 90-, and 180-day compound SOFR averages.
So you got this far into a dry
discussion about why your mortgage index is changing to SOFR. New ARM home loans
sold will start with the SOFR index. Older existing mortgage serviced or maintained
by banks, mortgage lenders, entities etc. will transition to SOFR as the
preferred index that measures the pulse of interest rates. Consumers won’t have
much choice in the change, read your promissory note, typically the index can be
rolled to like kind. The challenge now is for lenders and servicers operating systems
to make changes in calculations in a time where the cost of servicing loans in
forbearance and grey clouds may be difficult. As a consumer you can ask for a
copy of your original promissory note and any ARM riders to check what you
signed long ago.
If you need help just call me.
C G 949 784 9699
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