Interest Only Strip

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Interest Only Strip

A derivative security whose cash flow derives exclusively from interest payments on various debt securities. That is, the underlying asset of an interest-only strip is interest paid on debt securities, rather than the debt securities themselves. Many interest only strips are backed by mortgage interest, but some are also backed by Treasury securities and other debt securities. Interest-only strips are derived from bonds whose coupons are legally separated, or "stripped", from the bonds themselves.
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Sale of an IO strip and retention of the PO portion is an obvious example.
After discussions with investors in both assets, I concluded that servicers must replace runoff to utilize their excess capacity (or exit the industry), whereas IO strip investors can stop investing any time they want.
This excess interest (or spread) is economically the same as an IO strip.
According to Doral, the restatements are necessary to correct the accounting treatment for valuing Doral's IO Strip Portfolio.
The press release also stated that the restatements were made to correct the accounting treatment for the value of its IO Strip portfolio, and the Company's preliminary estimate is that this correction will result in a decrease in the fair value of its floating rate IOs of between $400 million to $600 million as of December 31, 2004.
0 million decrease, before taxes, in the Company's IO Strip which reduced earnings and strengthened the Company's balance sheet.
In addition, the Company's IO Strip decreased by $21 million as a result of hedging activities which had no impact on current earnings.
Prepayment rate assumptions used in valuing the company's IO Strip were revised to 27% for fixed rate loans, 33% for intermediate rate loans and 39% for ARMs.
IO strips are precisely the same instrument as excess servicing.
The underlying securities remaining in Structured Asset Securities Corporation 2007-5R consist of Lehman Mortgage Trust 2007-3 class 2A1 (rated 'CC/RR3' by Fitch), Structured Asset Securities Corporation 2004-20 class AP (rated 'A/LS1'; Outlook Stable by Fitch), Structured Asset Securities Corporation 2005-1 class AP (rated 'B/LS1; Outlook Negative by Fitch), Structured Asset Securities Corporation 2005-5 class AP (rated 'CCC/RR3' by Fitch), several Fannie Mae and Freddie Mac Principal Only bonds, and two Freddie Mac IO strips.