A borrower who got a 3/5/7 yr fixed loan say in 2005 probably has a rate around 5.5%. Most of these loans are tied to the 1 yr treasury, which is about 0.5% today. The typical margin is 2.5%. If their fix rate were to convert to a fully adjustable loan today, it would be a nice xmas present as their rate would actually adjust down from 5.5% to 3%. The same is true for option arm loans which are tied to the MTA index currently around 2% resulting in a rate of 4.5% assuming 2.5% margin. The option arm loans allow for 4 payment options each month. Option 1 is neg amortization with 7.5% annual cap. Most people I know with these loans pay option 2, or interest only in order to keep principal in check. Option 3 & 4 are traditional 15 and 30 yr fully amortized payments.

We are in a deflationary period for the forseeable future. My guess is that the feds are not going to raise the rate for at least 1 yr, and then very slowly. Therefore the 2nd wave of loan resets to start in 2010 will ironically result in less defaults.