To examine the possible effects of a slowdown in home price appreciation, Citigroup Global Markets researchers recently studied a sample portfolio consisting of 75% 2/28 hybrids and 25% fixed rate MBS, with home price appreciation in 2.5% increments varying from a 10% increase to a 2.5% decrease.

After several years of accelerating home price growth, U.S. home prices are poised for more modest price gains in 2005, and short interest rates are seen expected to continue moving upward. Citigroup feels that if prepayments on hybrids were to slow down, these three combined effects would generally lead to higher losses in subprime mortgage ABS, as the majority of subprime hybrid loans reset to a higher monthly payment on the first reset.

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