However, fate of the remaining alt-A loans and prime loans with resets in between now and 2011 will depend on rates.
The typical alt-A 5/1 loan originated in 2005 for example had a start rate of between 5.5 to 6%, fixed for 5 years. These are tied to an index and will reset at that index, plus a margin.
Typical index is the 12-months LIBOR. Margin of 2.25 to 2.5%.
Based on current 12-month LIBOR index, these would reset to the 12-month LIBOR plus 2.25 to 2.5 %, which would put them at 5.75 to 6%.
Outside of the option ARMS, the rate itself and even the inclusion of principal is not enough to trigger rampant defaults. I don’t think resets by themselves outside of the option ARMS are going to be as much of a factor as the fact that property values have declined to the point where the owner is underwater.
