Commercial mortgage market should prep for Libor switch now: MBA
While the London interbank offered rate won't go dark until 2021, the commercial real estate finance industry should start preparing for the transition now, says the Mortgage Bankers Association.
"It is vital that the industry prepare for what comes next with respect to Libor-based commercial mortgage loans. Companies should watch market developments closely and take steps to prepare in light of the uncertainty around the successor index and how it will function," said Andrew Foster, the MBA's director of commercial multifamily and staff lead of its Libor Outreach Committee.
The industry can start by evaluating existing Libor-related exposure in their current portfolios, to stay ahead of which loans may eventually need to be refinanced and prepare for those maturing before 2022. It can also prep by reviewing operational requirements and preparing "adequate fallback language" for new floating-rate loans being closed, the MBA's Outreach Committee wrote in a primer to commercial mortgage professionals.
Libor's shrinking bank activity, which includes wholesale deposits and short-term commercial paper notes, in addition to claims of manipulation, ultimately led to it being phased out. The industry can benefit from promoting the voluntary adoption of the successor rate from lenders and borrowers, which will help support a smoother transition ahead of the switch.
Commercial mortgage market participants are encouraged to join the Federal Reserve's Alternative Reference Rates Committee to stay current on Libor updates, the MBA said in its primer. Those with international floating-rate portfolios should also stay mindful of implications on those loans.
The government-sponsored enterprises have also played an active role in backing the change, as Fannie Mae recently priced more securities that show support of a transition away from Libor.