Although, I don’t think lenders will voluntarily reduce rates, one should consider potential scenarios for rates actually re-setting at reasonably low rates at some point in this cycle.

Nobody here seems to think that could happen.

First, it is instructive to consider the terms of many of these loans. For your more standard ARMS (Alt-A and Prime), they will typically reset to an index (e.g. 6- or 12- month LIBOR 6 month or 1 year treasury) plus a margin (e.g. 2.25%).

Consider that the LIBOR is at about 5.2-5.3 for the 6- or 12-month index. That means that for typical ARM loans resetting now, the rates would be something in the range of 7.45 to 7.55.

This is based on the terms when the loan was taken out.

If the economy tanks and short-term rates decline (as they have in 5 of the past 6 recessions), it is possible that loan resets could be in the 6% range or lower.

It’s too late for many of the loans about to reset this year. But, this is a plausible scenario for loans resetting in the second wave of resets.