The combination of falling real estate values, high loan-to-value ratios, and borrowers with spotty credit history is causing problems for Quality Mortgage USA Inc.'s 1993-vintage loan pools.

Duff & Phelps Credit Rating Co., New York, downgraded another pool of Quality loans last week.

It was the second time in a month that Duff & Phelps had expressed concern about the future performance of the Long Beach, Calif., lender's securitized loans.

The loan pool in question is concentrated in Southern California. More than 31% of the loans are delinquent or in foreclosure.

In addition, realized losses on the pool jumped to $420,000 in May, including more than $200,000 from a single foreclosed loan, Duff & Phelps reported. The monthly average for the previous 12 months was $40,000.

The rating agency said it didn't know why they losses were so severe, and Quality Mortgage officials was unavailable for comment.

Cumulative losses are approaching 2% of the original pool balance, even though the loans were part of securitzer DLJ Mortgage Acceptance Corp.'s repurchase program, which required Quality to buy back those that defaulted early. Quality stopped repurchasing loans from this pool in May 1995.

"These are loans originated through Quality's equity lending program to D-quality borrowers," said Michelle Lyn Russell, an analyst with Duff & Phelps. "When you're a homeowner faced with the economic environment occurring in California, what do you do?"

For many of the loans in the pool, equity is now less than the loan amount, Ms. Russell said, and borrowers are walking away from their homes.

In addition, a servicing transfer early this year may have given especially credit-savvy borrowers an excuse for a missed payment, Ms. Russell said. On Jan. 31 servicing responsibilities were switched from the now defunct Lomas Mortgage USA, Dallas, to Temple Inland Mortgage.

"Once subprime borrowers are a payment or two behind, it's hard for them to come back," Ms. Russell added. "They're not thinking, 'I'll just put my payment in escrow, because I'm going to pay it later.'"

Temple continues to do an aggressive job servicing the loans, she added, but some particularly astute borrowers may be using bankruptcy to delay foreclosures.

The combination of high loan-to-value ratios and borrowers with poor credit records has added up to heavy losses for Quality, but "it's premature to say that securitized B and C loans are bad," Ms. Russell stressed.

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