Securities backed by subprime loans are still feeling repercussions from the souring of the Southern California's economy in the early 1990s.

Four pools of loans, made by Long Beach Bank of Orange, Calif., and Quality Mortgage of Irvine, Calif., were recently downgraded by Duff & Phelps Credit Rating Co.

The loan pools were originated in 1992 and 1993, with 40% to 60% of mortgaged properties located in the Los Angeles area.

Duff & Phelps downgraded the two securities originated by Quality Mortgage - and issued by Donaldson, Lufkin & Jenrette Securities Corp. - from BBB to BB and BB-minus. Long Beach's Greenwich Capital-issued securities went from BBB-minus to CCC and BB.

Southern California's housing market was to blame, the credit rating agency explained. Following the area's economic downturn early this decade, housing values plummeted, destroying loan-to-value ratios and increasing delinquencies. Losses on defaulted mortgages were high in areas that saw severe declines in home values.

In predicting subprime loans' performance, the agency explained, the health of local housing markets can be as important as a borrower's creditworthiness.

In Southern California, homes priced in the low to middle range - the type often owned by borrowers with poor credit - saw the greatest depreciation in value.

"It wasn't clear when these loans were made how severe the decline in real estate values was going to be," said Henry Hayssen, an analyst with the rating agency.

Quality and Long Beach may have been too aggressive in their underwriting, noted another industry expert.

Both Quality Mortgage and Long Beach declined to comment.

But market scouts shouldn't necessarily expect other securities with high concentrations of Southern California-based subprime loans to be downgraded, said Christine Clifford, partner at Wholesale Access, a Columbia, Md.-based consultancy.

Aames Financial Corp., which lends to California borrowers with poor to awful credit, traditionally insures their deals using a financial guarantee company, explained Ms. Clifford.

Few other subprime lenders securitized pools of similar loans in 1992 and 1993, she added.

Real estate values also dictated other recent Duff & Phelps upgrades of subprime loan pools.

The rating agency upgraded three transactions backed by loans originated by Alliance Funding Co., Montvale, N.J., in 1993 and 1994 in Seattle and Chicago and on the Atlantic Seaboard.

Although East Coast home values have not improved considerably, both Seattle and Chicago have seen home prices increase by about 8% over the last three years.

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