With the IO product expanding its market share significantly, analysts expect it to overshadow other affordability products, specifically the 40-year mortgage. As a result, there is now increased attention on the prepayment performance of IO collateral, as evidenced by UBS starting a new section in its weekly report about the prepayment outlook on agency and non-agency hybrid IOs, with analysts noting increased investor interest in and demand for the collateral.

In a recent report, Credit Suisse First Boston also noted that fixed-rate IO mortgages are starting to make up a more significant portion of the origination and issuance mix, likely to overshadow the 40-year mortgage - a new entrant in the affordability products playing field - which Fannie Mae began purchasing on June 1. Fixed-rate IO product directly competes with the 40-year mortgage since borrowers who self select into fixed-rate mortgages would more likely compare these two products, according to CSFB.

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