Also of note, is that the LIBOR index has fallen steadily over the past several months. The beginning of the decline was about the time the FED cut rates.
Consider the Loan re-sets that are scheduled in the next 18 months. Most of the sub-prime loans will reset within the next 8 months. We all know that those people are screwed.
However, the next wave after that is more heavily Alt-A and Prime loans, that were initiated with 3- to 5-year resets. Some folks have speculated that that is when the Fit really hits the Shan.
Consider that typical Alt-A and Prime borrowers were getting loans tied to 1-year LIBOR + 2.25% (or similar) up through at least early 2006.
Their reset rates would now be less than 7%.
The severity of the “second wave” of loan resets will depend heavily on rates. My position is that the second wave will not be as bad as the first if we see continued downward pressure on interest rates (which we typically do see in slowdowns /recessions). It is worth keeping an eye on this factor over the next 18-24 months.
