But you are ignoring the spread between the Fed Funds Rate and the Libor rate. It is not headed in a favorable direction.

Not really. The two have dropped by about 0.75% since summer.

Second, how does the interest rate help an FB is their LTV has already passed certain thresholds already? Especially given current lending standards.

Their existing loan is not impacted by current lending standards. Only those with Neg-am loans are impacted by LTV thresholds and those folks are likely F’d no matter what.

But, you’ve seen those loan reset charts, right. The next wave of resets are primarily Alt-A and prime borrowers. The idea is that many have teaser rate loans that reset in the next year or two and that because these rates will result in much larger payments these guys will toss the keys to the bank and provide a fresh source of REOs for us in 2009-2010.

Let’s consider those who could afford (perhaps barely)their original 3- or 5-year ARM at the original 5.5 – 6% rate, but who are facing resets in the next 2 years.

6 months ago, these folks would have been facing a 7.75% or higher loan upon reset, based on the 1-year LIBOR and a margin of 2.25%. That’s why the loan reset schedule seems so scary.
Today, they are looking at about 6.75%.

Another 0.75 to 1 point drop in the LIBOR index and their reset rate will be about the same as their original teaser rate.

So you see, rates matter for those who have loan resets coming. These are the terms of their current loan irrespective of current lending standards.