Not long after information bearing the actual extent of the damage caused to the Gulf Coast region by Hurricane Katrina began to hit investors on Wall Street, mortgage lenders, insurers and others, did the conversation turn to the future - and what natural disaster, and where, could hit next.

The specter of a massive earthquake in the state of California came to mind. Unlike regions along the Mississippi and Louisiana coast lines, even within the New Orleans metropolitan area, where mortgages are smaller and fewer and farther between, a natural disaster of the scope of Hurricane Katrina could have the ability to cause more than a blip in all sorts of mortgage portfolios. Particularly in the subprime mortgage arena, lenders such as Accredited Home Lenders, Ameriquest Capital Corp., Countrywide Financial Corp. and New Century Financial Corp. are not only based in the region, but count Californian customers as, on average, 20% of their books of business.

To be fair, the California real estate market encompasses roughly the same amount in dollar value of the entire U.S. market, making it difficult, as many of the above mentioned lenders have pointed out, to realistically reduce exposure to the state. And, because of the risk of any investment portfolio containing too many assets concentrated in one geographic area, whether it be for risk of a natural disaster or regional economic downturn, large concentrations are typically avoided.

RBS Greenwich Capital, in a recent study, found that, based on the amount of exposure within some of the largest subprime residential mortgage-backed securities dealer shelves, the implications may not be so bad.

As of October, subprime RMBS backed by homes in California's seismic hazard zones accounted for an average 10% of issuer portfolios, according to RBS. RBS found that subprime issuer exposure ranged from less than one percent to a little more than 40%, but pointed out that the likelihood of one earthquake causing damage in all of the predetermined hazard zones was very low.

RBS used the voluntary mortgage loan database run by LoanPerformance for all first-lien subprime loans outstanding in the month of October along with earthquake hazard zone data from the State of California's Department of Conservation to find some $426 billion in outstanding balances of loans originated in the quake areas.

The issuer with the largest outstanding balance of loans backed by properties in California earthquake zones was Structured Asset Investment Loan Trust, with $4.3 billion, followed by Countrywide Home Loans with $4 billion and Park Place Securities Inc. with $3 billion. Even then, total concentrations in these issuers' pools reached some 12.80%, 11.52% and 10.13%, respectively.

Out of the top 24 issuers with the largest dollar share of the California earthquake zone loans, the issuer with the highest concentration was Merrill Lynch Mortgage Investment, with a 19.73% share, or $1.4 billion out of a $7.1 billion pool, according to RBS. The issuer with the lowest exposure to the area was Residential Asset Securities Corp., with only a 3% concentration out of its $22.5 billion pool. Out of the top 24, the weighted average exposure to the loans of outstanding balances was 10.5%.

"This examination leaves us feeling somewhat upbeat about earthquake risk and exposure when considering the potential for credit losses in subprime mortgage securitizations resulting from an earthquake," RBS analysts wrote.

However, RBS pointed out that a number of factors, such as the prevalence of earthquake insurance and required structural precautions, still needs to be taken into account when factoring in potential losses resulting from an earthquake.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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