Sept. 18 (Bloomberg) -- Securities backed by prime U.S. jumbo mortgages may be riskier than investors think because almost half of the underlying loans are from California, where home prices may again collapse, according to Barclays PLC.

California accounts for 45 percent of jumbo mortgages in securities sold last year, up from 35 percent in 1989, Barclays mortgage-bond analysts wrote in a report yesterday. Following a housing boom, home prices in California declined by 12.5 percent between 1991 and 1995. Losses after foreclosures on jumbo loans securitized in 1989 rose to 3 percent, which would be enough to cause many current investment-grade bonds to default.

``The current housing environment in California appears similar to the 1990s,'' wrote the New York-based analysts led by Ajay Rajadhyaksha. ``Many investors believe that jumbo credit is sound. We think that this sense of security is misplaced.''

As demand wanes for non-guaranteed mortgages bonds amid tightened bond-financing terms and the highest U.S. foreclosure rate on record, jumbos have fared better than their counterparts. Earlier this month, investors offered to pay 75 cents per $100 more for fixed-rated prime jumbo securities than for similar non- jumbo Alt-A debt, according to Deutsche Bank AG.

About $500 billion in prime jumbo-loan bonds are outstanding, according to a March report from Zurich-based Credit Suisse Group. Prime mortgages are considered the safest, and meet the standards of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac. Jumbo mortgages are those larger than what the government-chartered companies may buy, or above $417,000 for the past two years. Alt-A mortgages fall short of the companies' standard guidelines.

Housing Recession

The housing recession in the early 1990s in California was driven by over-appreciation in the preceding years and job losses in the defense industry, the Barclays analysts wrote. Today, a rapid rise in prices may combine with tightening lending terms to cause another crash.

For instance, Detroit-based GMAC LLC's GMAC Residential Funding Corp. and IndyMac Bancorp Inc. of Pasadena, California, no longer offer jumbo mortgages with down payments smaller than 5 percent amid lower bond investor demand, and the lenders also have tightened income-documentation requirements, they wrote.

The median resale price of a single-family home in California in July 2007 was $586,030, compared with $221,500 in December 1999, according to the California Association of Realtors. Though ``credit drying up'' will depress the state's housing market in the short term, lending may loosen and the state's economy remain strong, Leslie Appleton-Young, the group's chief economist, said in a statement last month.

Documented Income

The effects of a California slump on jumbo securities will be worsened by the loans also having ``become riskier,'' the Barclays analysts wrote. More than half of fixed-rate California jumbo mortgages packaged into bonds in 2005 and 2006 didn't require borrowers to fully document their incomes or assets, compared with 19 percent in 1989, they said.

The share of prime jumbo mortgages in bonds at least 90 days late, in foreclosure or already turned into seized property rose to 0.38 percent in June from 0.23 percent a year earlier, according to Arlington, Virginia-based securities firm Friedman Billings Ramsey Group Inc. That compares with a recent high of 1 percent in 2002, and to record default rates of 3 percent and 13.4 percent for Alt-A and subprime loans, respectively.

Investors in highly rated securities backed by pools of jumbo mortgages are protected against lower levels of loan losses than investors in bonds backed by riskier loans. For BBB securities, the second-lowest investment grade, the protection may be about 1 percent or less, the Barclays analysts wrote. The protection can come in the form of having lower-rated securities hurt by foreclosure losses first, among other things.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: September 18, 2007 11:01 EDT