Residential mortgage-backed securities (RMBS) with a high concentration of California mortgages issued since the mid-1990s are not showing the high mortgage losses that once plagued similar securities from the early nineties. When California began its recession in 1990, housing prices were soaring, and the California economy was poised for disaster as layoffs increased across the state. The overheated housing markets started sliding shortly thereafter as home prices decreased and borrowers defaulted. Losses accumulated on deals collateralized primarily by California properties, and bondholders of subordinate classes felt the brunt of mortgage losses. Because of the poor performance of these securities from the early 1990s, deals collateralized by pools with significant concentrations (30% or more) of properties located in a single state, usually California, have carried a stigma that continues today. However, over the past decade, originators, issuers, and rating agencies improved their processes, alleviating some of the risk of geographically concentrated mortgage pools.
Today, originators benefit from the use of automated underwriting systems (AUs). Implementation of AUs has streamlined origination practices, creating efficiencies and enabling lenders to originate with more consistent standards. Borrowers meeting the originators' guidelines are approved more quickly, and the risk profiles of these mortgagors are more consistent and predictable. Credit and mortgage scores give additional insight into identifying the relative risk of borrowers and appropriate risk-based pricing, and automated valuation models provide a less costly and less time-consuming alternative for evaluating properties and are often more reliable, with less biased results.