The transition away from the LIBOR index, and possible use of Secured Overnight Funding Rate (SOFR) as an alternative, has become a more prominent issue in 2019, as evidenced by a recent Ginnie Mae REMIC transaction that included some SOFR-indexed classes. Given the general interest in the issue, and some questions we received about this transaction, we thought it would be worth providing a detailed explanation on Ginnie Mae’s first-ever SOFR-indexed REMIC transaction.
In April 2019, Amherst Pierpont Securities LLC, one of Ginnie Mae’s approved Multiclass Securities Program Sponsors, sponsored a Multiclass Securities transaction, Ginnie Mae 2019-054, which included several Classes of securities indexed to a monthly calculated SOFR. The assets underlying those Classes consisted of Ginnie Mae-guaranteed, single-family MBS backed by Adjustable Rate Mortgages (ARMs) indexed to the U. S. Treasury One-Year Constant Maturity Treasury (CMT) index.
The SOFR-indexed REMIC Classes included in Security Group 6 of Ginnie Mae 2019-054 were:
- Class HF - $40MM Weighted Average Coupon/Floating Rate Pass-Through Class;
- Class HI - $40MM Notional Weighted Average Coupon/Interest-Only Pass-Through Class;
- Class IO - $40MM Notional Fixed Coupon/Interest-Only Pass-Through Class.
The $40MM SOFR-indexed bonds were a subset of an aggregate issuance of approximately $265MM of multiclass securities.
What it Was:
Ginnie Mae 2019-054 represents the first Ginnie Mae transaction in which the Sponsor created a SOFR-indexed security. The related Offering Circular Supplement (available on Ginnie Mae’s website) and transaction documents contained new sections for interest rate calculations, selection of the applicable SOFR and, under certain circumstances, selection of a replacement interest rate. These sections were informed by guidance of the Alternative Rate Reference Committee (ARRC), a Federal Reserve Board and NY Federal Reserve Bank-sponsored working group, with respect to SOFR.
The documents defined terms such as “SOFR Suspension Period” and “SOFR Reset Date” and described the method for determining a monthly average SOFR Rate from the daily posting of SOFR by the NY Federal Reserve. The Sponsor adopted a simple average calculation, rather than a daily compounding average, based upon the actual number of calendar days in the prior accrual period. The lookback period for averaging the daily rates is an “advance” method in which the SOFR rates are posted ahead of the bond’s next accrual period. The advance method is essentially a 30-day lookback from the beginning date of the next monthly accrual period.
The Sponsor, with Ginnie Mae’s approval, chose a simple average calculation because it conceptually matches the simple average method of the CMT One-Year Index so that Sponsors, REMIC Trustees, Ginnie Mae, Ginnie Mae’s Financial Advisor and the Information Agent can easily validate the monthly interest rate.
Sample Timeline of Ginnie Mae 2019-054 SOFR Calculation
||May 20 - June 19|
|SOFR Calculation Period
||April 20 - May 19|
|SOFR Suspension Period2
||May 16 - May 19|
|SOFR Disclosure Date
The Ginnie Mae 2019-054 SOFR provisions also included a base index waterfall that addressed SOFR unavailability. SOFR (or a replacement rate in certain specified circumstances) for each rate reset date is determined in the following manner:
SOFR is published by the Federal Reserve Bank of New York at approximately 8 a.m.;
If that rate is unavailable and if No SOFR Cessation Event or SOFR Cessation Date has occurred, SOFR is published on the immediately preceding date;
If a SOFR Cessation Event and SOFR Cessation Event have occurred, the replacement index is recommended by the NY Federal Reserve, provided Ginnie Mae and the Trustee have received a tax opinion that the related trust will not lose its REMIC status. Pending the tax opinion, the replacement rate is the Overnight Bank Funding Rate (OBFR) published by the Federal Reserve Bank of New York, provided Ginnie Mae and the Trustee receive a REMIC tax opinion with respect to OBFR;
If an OBFR Cessation Event and OBFR Cessation Date have occurred, the replacement index is the short-term interest rate target set by the Federal Open Market Committee and published by the Federal Reserve Bank of New York, or if the Federal Open Market Committee has not set a single rate, the midpoint of the short-term interest rate target range set by the Federal Open Market Committee, in either case, provided Ginnie Mae and the Trustee receive a REMIC tax opinion with respect to such rate;
If a rate cannot be established under the preceding waterfall, Ginnie Mae may select an alternative index, provided a REMIC tax opinion is received with respect to the alternative index; and
If a replacement rate cannot be established, the rate defaults to the last available SOFR.
The SOFR and OBFR Cessation Events and Cessation Dates are defined in the Ginnie Mae 2019-054 Offering Circular Supplement and generally relate to the unavailability of SOFR and OBFR.
Why We Accommodated the SOFR-Indexed Classes:
Prior to Ginnie Mae 2019-054, the array of indices available for Ginnie Mae transactions included only LIBOR, COFI, Prime, and various Constant Maturity Treasury indices. In Ginnie Mae 2019-054, SOFR was added at the Sponsor’s request. Ginnie Mae agreed to this request to facilitate the creation of offering and transaction documents necessary for a defined structure of SOFR-indexed securities. This process enabled investors to assess the merits of such securities, permitted transaction parties to allocate responsibilities with respect to the replacement index provisions, and allowed Ginnie Mae to establish the operational capabilities for a monthly SOFR rate. In addition, Ginnie Mae was pleased to foster efforts to develop a robust market for SOFR-indexed securities.
What it Wasn’t:
Ginnie Mae 2019-054 introduced new SOFR-indexed securities. The transaction also included separate LIBOR-indexed securities, but those LIBOR-indexed securities are not linked to the SOFR-indexed securities or SOFR provisions and do not address the replacement of LIBOR as an index if LIBOR becomes unavailable. For those LIBOR-indexed securities, if LIBOR becomes unavailable, the Trustee will propose a new index for approval by Ginnie Mae based upon comparable information and methodology if the Trustee receives appropriate tax opinions.
- Ginnie Mae 2019-054 was the first Ginnie Mae transaction to include SOFR-indexed securities;
- Ginnie Mae 2019-054 laid the groundwork for future Ginnie Mae transactions with SOFR-indexed securities; and
- The SOFR provisions included in Ginnie Mae 2019-054 provide for selection of replacement indices if SOFR becomes unavailable.
In conclusion, Ginnie Mae will continue to support Sponsor efforts to develop the market for SOFR-indexed securities. If SOFR, or any other index, is selected as the LIBOR replacement, the development of alternative index securities allows capital market participants to establish their respective operational and investment capabilities.
1 REMIC floating rate classes have zero Payment Delay days.
2 SOFR from the 2nd Business Day before the end of the Accrual Period is used for each day of the SOFR Suspension Period to allow the Trustee to complete the interest rate calculation for the approaching Accrual Period.