Much has been written over the past decade, in this journal and elsewhere, about the manipulation of the London Inter-Bank Offered Rate (LIBOR) and the subsequent decision to end its use as a benchmark interest rate. This article addresses the challenging issue of LIBOR transition—that is, moving from LIBOR to another benchmark rate—for asset-backed securities such as residential mortgage-backed securities (RMBS). RMBS is one of a class of assets that face the complication of two levels of transition: LIBOR-indexed mortgage notes that are assets of an RMBS securitization trust, and LIBOR-indexed interest rates paid on the securities issued by the securitization trust.
LIBOR-Indexed Mortgage Lending and Securitization
To understand the challenge, first consider how residential mortgages are securitized into RMBS trusts. When a lender makes a home loan, the loan typically is secured by note and a mortgage. The notes often have variable interest rates. In the run-up to the 2008 financial crisis, residential mortgage notes—and particularly sub-prime residential mortgage notes—often were indexed to LIBOR. This means that the annual interest rate the borrower paid was not set at a fixed number but instead as LIBOR plus an additional percentage, such as LIBOR plus 3%. As LIBOR changed, the rate the borrower paid was (at agreed time intervals) changed.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.
For questions call 1-877-256-2472 or contact us at [email protected]