As our transition to implementing the SOFR index nears, we’d like to provide clarity on our approach to interest rate caps for SOFR-based loans.

Borrowers with a SOFR-based loan will be permitted, on a temporary basis, to purchase a LIBOR-based cap agreement instead of a SOFR-based cap agreement. While Freddie Mac’s requirements for interest rate caps are not expected to change if a SOFR-based cap agreement is purchased, additional requirements will apply if the borrower elects to purchase a LIBOR-based cap. The anticipated additional requirements if a LIBOR-based cap is purchased for a SOFR-based loan include the following:

  • Borrower will be required to make monthly replacement cap reserve deposits with the servicer sufficient to purchase a replacement SOFR-based, third-party cap within 12 months of the loan closing.
  • Lender will have the right to apply amounts in the reserve toward the purchase of a replacement SOFR-based, third-party cap under certain circumstances.
  • A guarantor will guarantee payment of the difference between the reserve amount and the cost of the replacement cap.
  • Borrower and the cap provider will agree to use Freddie Mac’s updated form LIBOR cap documentation, including provisions governing the transition to SOFR.

If you have questions, or feedback, please send us an email to [email protected].

We appreciate your partnership and look forward to a smooth transition.