The sharp decline in short-term interest rates has encouraged subprime mortgage lenders to include more fixed-rate collateral in floaters during the past two years, and investors have lately begun to balk at the embedded cap costs in mixed deals. However, changes made to the structure and collateral during the past year appear to have effectively offset the risk of declining WACs, according to recent research from UBS.

Going into 2003, some mixed deals included more than 40% fixed-rate collateral, the report found. "The more fixed, then the greater the basis risk, and hence, the larger the cap costs," analysts wrote.

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