Subprime pioneer is dead

You can't pin the mortgage mess on any one person, but Roland Arnall was certainly a player. It was June 28, 1990 when Long Beach Savings first offered securities backed by subprime mortgages. Long Beach Savings went on to become Ameriquest, which grew to be the nation's largest originator of subprime loans. Arnall wound up being a billionaire, not to mention a key Republican contributor - so much so that President Bush appointed him ambassador to the Netherlands. His appointment came soon after the company agreed to pay $325 million to settle allegations of misrepresented loan terms, hidden fees, puffed-up appraisals and fabricated borrower income statements. Arnall denied any knowledge of the hanky-panky, but lawyers for the borrowers now contend that he made decisions that drained the company of any profits. Ameriquest and its affiliates "were the alter ego" of Arnall, the suit says. Anyway, Arnall died Monday morning at UCLA Medical Center. He was 68. Late last year the Register offered a kind of primer on how subprime lending got started in OC.

"We did it here because you had a lot of talent," said Jon Daurio, an alumnus of Long Beach Savings who co-founded Encore and now runs a company that buys distressed mortgage loans. "You also had the Godfathers of subprime." Daurio said the Godfathers were Arnall, Brian Chisick of Irvine-based First Alliance Mortgage Co., Russell and Rebecca Jedinak of Guardian Savings & Loan in Huntington Beach, and John T. French, founder of Santa Ana-based Plaza Savings & Loan. French, now 76, said in an interview that the local lending industry evolved in response to market and regulatory changes. French worked with clients who had black marks on their records – a bankruptcy, missed payment, divorce – but who on close inspection seemed reliable. "The idea was to broaden the spectrum of underwriting," said French, who lives in Newport Beach. Like Long Beach Savings, Plaza and its executives gave birth to a brood of subprime lenders: Option One Mortgage Co., New Century Financial Corp. and Encore.

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Many subprime companies collapsed in the late '90s when world credit markets were slammed by debt crises in Asia and Russia. The survivors got a big bounce after the Federal Reserve slashed interest rates to juice up the economy following the dot.com bust and Sept. 11 attacks. The low interest rates ignited a real estate and refinancing boom that put the subprime industry on steroids. The Orange County companies that failed in the 1990s – Guardian and First Alliance – collapsed for the same reasons others went broke in 2007: high default rates on loans that regulators said were sloppily underwritten.