In the September issue of Short-Term Prepayment Estimates, Bear Stearns predicted that the hybrid IO product, which recently saw tremendous growth in California, would continue to gain popularity in other parts of the country, particularly among lower-income borrowers.
Bear said that ARM issuance suddently gained momentum in Q3 2003, which they linked to the surge in hybrid IO production in California. The amount of ARM issuance is far beyond what is normally expected, analysts said. In fact, just over the last 12 months, ARM share has been roughly twice the level that would have been expected judging from historical averages. "This is a clear indication of a structural change in the market and we think Hybrid IOs are responsible," analysts wrote.