Expectations for slowing in prepayment speeds for agency fixed-rate IOs relative to amortizing loans offer a compelling investment opportunity, Bear Stearns analysts said in a recent report.

Within the agency universe, analysts said there is a geographic self-selection of IO loan production to areas with the heaviest concentrations of affordability lending. They found, for example, that over the past six months, 41% of 2007 agency IO loan production has come from the four states with the highest affordability lending concentrations - California, Florida, Arizona and Nevada. This is an important finding as they expect the tightening in underwriting standards to have the greatest impact on purchase demand in these areas, analysts said. In addition, they believe the data show that fixed-rate IO loans have become an important replacement for affordability products in these areas.

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