Agency ARM issuance surged in September, jumping to $23.8 billion in September from $14.3 billion in August - the highest monthly issuance level ever recorded, according to Merrill Lynch analysts. Much of the growth could be attributed to Fannie Mae and Freddie Mac slowly embracing affor-dability mortgages in the ARM sector. After having shied away from option ARMs, for instance, the GSEs are starting to warm up to these products as evidenced by purchases over the last two months.

Morgan Stanley analysts reported that gross agency hybrid issuance more than doubled between August and September, largely driven by option ARMs. For instance, Fannie Mae securitized roughly $8.5 billion of option ARMs in September, comprising 43% of its gross issuance for the month.

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