The hybrid ARM product is currently readily available to borrowers at attractive rates versus the 30-year fixed sector - creating an additional refinancing incentive. This phenomenon has pushed discount prepayment speeds significantly upwards, compared to what had previously been seen.

"While discounts used to prepay well below 10% CPR in a sell-off, the recent experience has been much faster," said Morgan Stanley analysts in a recent report. The 1999 to early 2000 vintage experience demonstrates this well. During that period, 6.5s from 1998 - roughly 120 basis points out of the money - slowed down to 5% CPR in the beginning of 2000. Furthermore, even 1998 7.5s, which were just slightly out of the money, prepaid approximately 10% CPR.

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