When the Fed cuts its short term over night rate it usually causes long term yields to increase, so the 30 and 15 year fixed rates tend to go up. However, the adjustable rates which a majority are based off the the 6 month LIBOR (London Interbank Offered Rate) goes down as well.
How could this help those sub-prime loans? These adjustable rate mortgages usually have a 2 or 3 year fixed period at a teaser rate, averaging 7 - 8% range . Every 6 months after the fixed period the rate is adjusted. The adjustable rate is made up of 2 components, the margin (fixed predetermined number based off their risk, 6% range for sub-prime) and the index, which is the LIBOR I discussed earlier that sits at roughly 2.4% right now)
So if a loan is adjusting next month, it would now be in the 8.4% range, which still could be an increase over what people are paying now, but not a disastrous jump we saw just 6 months ago. Most likely a minority of people will be could be saved at least for another 6 months, but anything helps these days.
On the other hand, conforming adjustables could see a decrease in rates to a number lower than current 30 year fixed rates. Most conforming margins are around 2.75% add the 2.4% LIBOR, they are adjusting to 5.15%, mostly like a decrease in their payment.....not too bad.
