Q: My ARM was tied to an index that disappeared from the market. What happens to my rate now?
A: In a case where an index is no longer produced by its source, the regulator who oversees the process will usually find or produce another indicator which performs essentially the same function.
This phenomena happens from time to time, as various esoteric financial indicators come and go with changes in the market. The most recent example was the sunsetting of LIBOR, the London Interbank Offered Rate. Essentially derived from an opinion survey, LIBOR governed many ARM contracts (as well as trillions of dollars in other kinds of financial transactions) and replacing it was a multi-year effort. Ultimately, a new transaction-based index was derived, called the Secured Overnight Financing Rate, or SOFR for short.
After proper borrower notification, lenders simply switched over to SOFR. In some cases, terms of some loans needed to be modified, and some loan contracts may allowed to use what is called a "synthetic LIBOR" for a period of time.
It's hardly the first time this has happened. The formerly-very-common 11th District Cost of Funds also recently came to an end fairly recently, as there were no longer enough lenders to properly populate the index each month. While it cannot be used to govern the changes for new loans, lenders can substitute a so-called "Enterprise 11th District COFI Replacement Index" based on the Federal Cost of Funds for making rate changes on existing loans.
Over time, many indexes have come and gone. For example, the OCC stopped posting data for the "Monthly Median Annualized Cost of Funds" index used on some ARMs back in 2012. This was based on deposit costs at thrifts (a.k.a. Savings and Loans), whose numbers had been dwindling for years. Some notables no longer with us include Washington Mutual and World Savings, just to name two.
In this case, the MMACOF was discontinued when the regulator (The Office of Thrift Supervision) was merged into the Office of the Comptroller of the Currency in 2011. The index which replaces the old MMACOF is called the "Federal Cost of Funds"; this is produced by Freddie Mac each month and is based on the government's borrowing costs, rather than those of specific industry segment.
Other examples include the discontinuance of one of the earliest ARM indexes, called the "National Average Mortgage Contract Interest Rate for the Purchase of Previously-Occupied Single Family Homes," sometimes called the National Mortgage Contract Rate (NMCR) for short. Based on a monthly survey of closed loans, it too came to its demise from dwindling participation in the Federal Housing Finance Agency's Monthly Interest Rate Survey (MIRS). Any outstanding loans based on the NMCR were migrated to a derived index called the "MIRS-Transition Index", which could also only be used on legacy outstanding loans.
So having an ARM index disappear from the market isn't uncommon at all, and the processes for replacing them when they do is well understood, and mostly seamless.
To learn more about ARMs, how rate adjustments occur and the impacts of interest rate caps, peruse HSH's Comprehensive Guide to ARMs.
