FSD is right. The Libor spread has been pretty high, but after we get through year-end and in conjunction with the money-drop announced today (which is not likely to be the last) I expect the spread to contract. My wild guess and I don’t think I’m venturing too far out on a limb is that we will see more Fed cuts as we enter ’08. I think we will ease to 3.5 and see a Libor spread contraction and the 6 mo. and 1 yr. Libor both below 4.0.
My 2 top mortgage broker sources maintain that they sold a ton of 3/1 and 5/1 10 yr. IO ARMS in ’04 and ’05 with initial rates in the 5.5-5.75 range, 1 yr Libor index with 2.0-2.25 margins. From the looks of where we are headed, these loan resets may result in minimal if any payment increases. In addition, if they are on the front end of an 80/20 package with (as I’m told) a HELOC 2nd tied to the prime rate plus a 2.0-2.25 margin, well, the payments on the 2nd have been falling since the first Fed cut, and again are likely to fall further as we go forward.
So the question begged is what percentage of the impending resets are on these types of loans, where the payment adjustment will be minimal if any on the 1st and is actually falling on the 2nd? This I do not know.
