Thoughts about changing from LIBOR to SOFR as an mortgage Index??

[Nathan Trunfio]

The interest rates of many residential Fannie and Freddie loans (ARM's) as well as numerous types of commercial loans are based off LIBOR plus a spread.

Anyone have thoughts about the effects of the banking industry changing from LIBOR to SOFR?  Here's my 2 cents:

Suffice to say that this will effect a lot of mortgage for real estate investors. This doesn't mean that you should panic, and if you have questions, read your loan docs, and call your lender.

What's interesting to me is that this has been planned for a few years now, yet there's still some unknowns, questions, and uncertainties from many of the counterparties involved.

From what I can see, borrower's won't have too much of an effect as the banking sector is trying to not rock the boat too much, and rates should be comparable - it's just a different "measuring stick" that a couple dollars around the world are based on :)

SOFR is designed to be less manipulatable than LIBOR since it's based on transactions rather than expert bankers judgments (it's pretty crazy to think that $200 Trillion of financial service products around the world are based on "experts judgments.") Although a number of people are concerned that SOFR will be more volatile, there will be other indexes that certain banks and institutions use as an alternative index option.

Most loan docs over the last 3-5yrs had verbiage related to the potential change, and they gave guidance on what indexes would likely be used, the calculations for the new index, etc. The global economic committees that oversee all of this has also imposed fallback provisions that will cover older loans that didn't have specific verbiage too. 

The biggest challenge and problems will be with the banks and bankers that have to deal with switching over all these indexes. The amount of logistics, paperwork, and clerical work is enormous..... but I guess that's what they deserve for basing so much money on an index based on experts judgments.  

Let me know your thoughts and feedback!