www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 March 1, 1988 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 88-7 TO: ALL APPROVED MORTGAGEES SUBJECT: Clarification of Correct Index to Use for Interest Rate Adjustments of FHA-Insured Adjustable Rate Mortgages (ARMS) This is to clarify the date of the index, published weekly in Federal Reserve Board Statistical Release H-15, which is to be used by mortgagees at the change date (i.e., interest adjustment date*) for each Adjustable Rate Mortgage (ARM) to determine whether or not the initial interest adjustment or annual interest adjustment must be made. The calculated interest rate used in an interest adjustment is to be based on the current index plus the "margin" (identified in the Adjustable Rate Rider or Allonge of each mortgage Note, paragraph 3(b).) The proper date to be used for indexing an interest rate adjustment is stated in 3(a) of the Adjustable Rate Rider which was attached to Mortgagee Letter 84-16: "The amount of the Index will be determined, using the most recently available figure, thirty (30) days before the Change Date ('Current Index')." GNMA is in the process of issuing a revision of its GNMA II Guide using language similar to 3(a) of the Rider. The index used, based on the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of 1 year, must be the one effective on the date thirty (30) exact days before the change date. The Federal Reserve Board Statistical Release H-15 is published weekly on Monday, or on Tuesday if Monday is a Federal holiday, and the index shown on that release is effective the day it is issued until the H-15 is issued the next week. _____________________ * The "change date," as used by HUD, and the "interest adjustment date," as used by GNMA, both indicate the same date (the anniversary date of the loan), which is the date on which the interest rate may be changed or adjusted. It is one month prior to the date on which the payment using the newly adjusted interest rate is due. _____________________ The following are the proper indices to use when the 30th exact day falls on: 1. A Monday which is a business day. Use the index rate contained in the H-15 release issued that Monday, if the 30th exact day prior to a change date and the issue date of an H-15 release both occur on the same day, i.e., they both occur on a Monday. 2. A Monday which is a Federal holiday. Use the index in the H-15 release issued the prior week if the 30th exact day before the change date falls on a Monday which is a Federal holiday. 3. A day of the week other than Monday. Use the index in the H-15 release issued on the Monday of that week (or issued on Tuesday if that Monday is a Federal holiday). For example, for an April 1, 1988 change date, 30 exact days before April 1 is Wednesday, March 2. The correct index to use is the one contained in the H-15 release scheduled to be issued on Monday of that week, which is February 29. Another example, showing that the extra day of February in a "leap year" must be included in the calculation of the 30 exact days, is for a March 1, 1988, change date. The correct index to be used is contained in the H-15 release scheduled to be issued on Monday, January 25. The "most recently available figure" is considered to be the index figure in the H-15 release effective for the date which is 30 exact days before the change date. If the interest rate and monthly payment on a loan must be adjusted, Section 203.49(g) of the Regulations requires that the Mortgagee provide a written notice (Adjustment Notice) to the mortgagor at least 30 days before the next scheduled monthly payment, which is a month after the change date. Modifications to Mortgagee Letter 84-28 . We request that you make the following modifications to ML 84-28 with respect to the index rate used: 1. Modify the definition of the current index in paragraph 3(a) because the wording has confused some mortgagees. It should read: "This is the published interest rate for U.S. Government Securities, Treasury Constant Maturities, 1- Year, using the most recently available figure, thirty (30) days (i.e., exact days) before the Change Date ('Current Index')." 2. Substitute the date of issuance for the identification of projected indices in the examples in 3(e) as follows: "Index issued 8/26/85" instead of "Index for week ending 8/30/85" "Index issued 8/25/86" instead of "Index for week ending 8/29/86" "Index issued 8/31/87" instead of "Index for week ending 8/28/87" 3. Modify the definition of Current Index in Exhibit B to read, "The most recently published index available 30 exact days before the Change Date." 4. Retain Exhibit C as an example, but note that the H-15 released August 27, 1984, would have contained the index for a mortgage with a Change Date of October 1, 1984. All mortgagees are required to keep documentation on their calculations of ARM annual interest rate adjustments. This documentation history must be kept in the servicing file for each ARM mortgage in a format available for ready review by HUD or the mortgagor, and must include the date and amount of the index used, the margin, and the carryover, if any, from the previous year. Sincerely, Thomas T. Demery Assistant Secretary NOTE: If these are any questions, please contact Robert E. Falkenstein, Jr., Director, Single Family Servicing Division at (202) 755-6672.