Independent analysts are still issuing grim predictions, despite the falling LIBOR rates. All told, 2 million homes will be foreclosed upon from the beginning of 2007 to the middle of 2009, Moody’s Economy.com predicted recently.

“Yes, payment-reset shock is going to be smaller. But there is a bunch of people who are not going to afford it,” said Gus Faucher, the director of macroeconomic forecasting at Moody’s Economy.com. He added that the foreclosure estimate already factors in the falling rates.

As the housing bubble has burst, many homeowners have found themselves underwater, with their home worth less than their mortgage. In cases where homeowners have little or no equity, they will be forced to put up large sums of cash to sell their homes, increasing the risk of foreclosures.

Also, borrowers with so-called option-ARMs, which require interest-only payments for a set period, will face more than just higher rates: They will have to start paying down the principal on their mortgages.

Meanwhile, people with so-called Alt-A loans — aimed at a category of borrowers in between sub-prime and prime — may not be helped much by falling rates because the loans granted wide leeway in interest payments for a set period.

Those loans will start to reset at floating rates in 2009, on the heels of this year’s sub-prime resets. “It’s a five-year phenomenon. It’s not short-lived,” Stein warned.

Finally, there is no guarantee that LIBOR rates will stay low or fall further. In testimony Wednesday before the House Financial Services panel, Federal Reserve Chairman Ben Bernanke signaled that he would ease the Fed’s key interest rate more despite quickening inflation.

But if inflation continues to pick up, the Fed may need to reverse course, which would ripple through to LIBOR. Said Faucher, “We’ve probably seen most of the big declines in LIBOR rates.”