With the refinance boom of 2003 seemingly over, extension risk in the home equity sector will be a hot topic in 2004. Although origination volume is expected to remain somewhat constant, as lenders move up the credit spectrum, prepayment activity should decline dramatically with some seeing segments extending out by nine additional years.

There are, however, strategies investors can employ to avoid pitfalls, such as vintage and tranche selection. For example, non-accelerating senior bonds and bonds priced this year offer the best shelter from extension. The upward trend in FICO scores seen in 2003 vintage transactions is credited with bolstering newer collateral.

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