Fannie Mae issues securities to support Libor alternative

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Fannie Mae has issued securities supporting the transition away from the London interbank offered rate, something that could become more pressing for lenders if adjustable-rate mortgages were to become more prevalent.

The first Secured Overnight Financing Rate securities transaction issued to this end is a three-tranche, $6 billion deal scheduled to settle July 30.

One $2.5 billion tranche of the floating-rate notes has a six-month maturity. The deal also includes a $2 billion tranche with a 12-month maturity, and a $1.5 billion tranche with an 18-month maturity.

The tranches were each priced above SOFR, respectively, as follows: 8 basis points, 12 basis points and 16 basis points.

Demand for the securities was strong and came from a diverse group of investors, according to Fannie Mae.

"With this milestone, our objective is to accelerate the development of the SOFR market and we encourage other issuers in the debt markets to follow," Nadine Bates, senior vice president and treasurer of Fannie Mae, said in a press release. "As a member of the Federal Reserve's Alternative Reference Rate Committee, we are honored to demonstrate our support to ARRC in its tremendous efforts to help develop an alternative to USD Libor."

Mortgage lenders have been looking for an alternative to Libor for their loans because it will be phased out by 2021.

But the issue hasn't been as pressing as some others for lenders because so far ARM share has remained low. Just 6.3% of mortgage applications were ARMs in the Mortgage Bankers Association's latest weekly survey, for the week that ended July 20.

Finding a replacement for Libor is expected to be less of a concern for lenders than the legal and regulatory risks that could arise as they implement operational changes to accommodate it.

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