With the surge in hybrid ARM issuance, mortgage-backed analysts are starting to change their models to reflect this phenomenon - shifting their emphasis from a reliance on historic data to being more borrower-oriented. This change is in line with the methodology they are currently using in their agency and non-agency fixed-rate models. Notably, hybrid non-agency and agency combined issuance is estimated to reach $400 billion in 2003, nearly double the pace of last year.

In a recent Lehman Brothers report, analysts also urge MBS investors to look at non-index sectors, including hybrid ARMs, to outperform the benchmark index.

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