We have a few 12-month ARMs tied to LIBOR. Will you please help me understand the difference in treatment between the "one-year period beginning on the LIBOR replacement date" and "one year after the LIBOR replacement date and thereafter in the final rule"?

The “one year after the LIBOR replacement date and thereafter” is easy enough. It’s the corresponding SOFR tenor plus the spread adjustment based on the adjustment period (in our ARM case, 12-month SOFR + 12-month spread, which is SOFR + 0.71513).

But the one-year period beginning on the LIBOR replacement date is different. It refers to “plus an amount that transitions linearly for each business day during that period from: (1) The difference between the relevant CME Term SOFR and the relevant LIBOR tenor determined as of the day immediately before the LIBOR replacement date; to (2) The applicable tenor spread adjustment identified in paragraph (c) of this section."

I can’t figure out what the difference and its calculation means between the two periods.

July 1, 2023 index = 12 mo CME Term SOFR + (difference between 12 mo CME Term SOFR and one year LIBOR as of 6/30/22)
July 1, 2024 index = 12 mo CME Term SOFR + 0.71513

During the period in between, the index is adjusted a little bit each day incrementally to move from the tenor spread amount on 7/1/23 to 0.71513 which is the tenor spread adjustment specified by the FRB (and the LIBOR Act) as the ultimate "landing place" for the spread amount. So if the difference between 12 mo CME SOFR and one year LIBOR as of 6/30/22 is 1.0513%, the replacement benchmark would transition divide that 30 basis points by the number of days for which the benchmark is published in a year, and would adjust the tenor spread downward by that amount each day.

The good news is that you don't have to do that calculation. You can just use the replacement index published by Refinitiv, who has been hired/designated to make the calculation and publish the replacement index values. That's what FNMA has directed its servicers to do.

Great. I appreciate your explanation and clearing that up for me.