Have you thought about what were to happen if LIBOR went away? While the benchmark for short-term interest rates isn’t set to go away through 2021, it’s not too early to ask yourself what would happen if LIBOR stopped tomorrow. The Alternative Reference Rates Committee (ARRC) has tapped the Secured Overnight Financing Rate (SOFR) as the LIBOR replacement. There are a whole host of differences between the two, but before you can start diving into SOFR, you should know what you need to be doing about LIBOR right now.
You need to check your contract language
While LIBOR is supposed to stick around for a few more years, the decision could be made to stop publishing those rates at any time. This would likely cause most LIBOR rates to revert to the Prime Rate, however, whether or not yours does will depend entirely on the contract language within specific clauses. Not reviewing and changing that language could result in your LIBOR rates reverting to something unideal, for both you and your borrowers.
Existing loans tied to the LIBOR should be reviewed to determine if the language is sufficient enough to provide clear direction in applying the new rate in the event the LIBOR is no longer published. Loan documents should be providing alternatives for choosing an interest rate in the event the LIBOR goes away completely
Keep an eye on your backup
You’ll also want to keep up with the Prime Rate, if that’s the rate your loan documents revert to in the event the LIBOR is no longer published. Let’s say that LIBOR stops being published tomorrow and your rates revert to the Prime Rate, which is 200 basis points higher than the LIBOR rate. That’s a huge difference to a borrower, and in some cases, could be the difference between affording something, and going into the red.
With LIBOR rates becoming more and more similar to a 30-year fixed mortgage as opposed to a 15-year, the decision to stop publishing LIBOR rates could happen sooner than later. That doesn’t mean you need to panic, though. By simply checking up on your contract language and making sure you know what your LIBOR rates would revert back to, you can have some peace of mind moving forward, no matter the outcome.