Tamika Williams worked in Phoenix for a mortgage company based in Agoura Hills. But her fate was tied to Wall Street, as she found out when she lost her job a few weeks before Christmas.
Williams, 29, was among 800 employees nationwide who were laid off when Ownit Mortgage Solutions Inc. announced that it was closing its doors immediately -- and had no money to pay its employees.
"I'm the primary wage earner for my family," Williams said, "and now I have four little children to support with nothing coming in."
When Ownit filed for Chapter 11 bankruptcy protection last week, its chief executive and sole director, William Dallas, expressed regret at how the company's destiny had spun out of his control. Dallas described the filing as the only way to ensure that his former employees would be paid before other creditors -- "a small, yet meager victory for the good guys," as he put it.
The private company, which made higher-cost mortgages for borrowers with imperfect credit scores and income gaps, relied on Wall Street to fund its loans, buy them and sell them off as securities.
Last month, as defaults on the risky loans rose, the Wall Street firms seized millions of dollars of Ownit's capital to compensate for losses and then shut off the money spigot entirely, Dallas said.
The bankruptcy filing revealed that Merrill Lynch & Co., JPMorgan Chase & Co., Credit Suisse First Boston and other mortgage purchasers were demanding that Ownit buy back more than $165 million in loans on which borrowers had missed payments.
Ownit's demise is an example of wider troubles among independent sub-prime lenders, which, unlike more diversified banking companies, depend heavily on Wall Street for loans and services. "This is going to end badly" for the industry, Dallas predicted.
Ownit's most important partners -- the ones that abandoned it, as Dallas sees things -- were JPMorgan Chase, which provided cash to fund its loans, and Merrill Lynch, which supplied a major line of credit for Ownit and processed its loans into bonds for sale to investors.
William Halldin, whose Sacramento public relations firm represents Merrill, said his client found it "unfortunate that Ownit closed its doors," but added: "We met every contractual obligation we had to them."
A JPMorgan spokesman declined to comment.
Ownit, which doesn't publicly report financial results, had become unprofitable and no longer met JPMorgan Chase's requirement for net worth, Dallas acknowledged. Nonetheless, he said, he had believed Merrill Lynch would put up funds to nurse Ownit through tough times.
After all, Dallas said, Merrill had become a part-owner of his company in 2005. And Ownit was on track last year to generate $10 billion of the mortgages that Merrill and other Wall Street firms coveted as raw material for lucrative bonds.
Global appetite for mortgage-backed bonds helped sub-prime specialists emerge in the mid-1990s as competition for old-line finance companies. After a near-meltdown in 1998, when Russia's debt default drove investors to flee to ultra-safe Treasury bonds, the bond market resumed its love affair with securities backed by sub-prime loans.
Issuance of sub-prime mortgage bonds jumped from less than $13 billion in 1995 to $594 billion in 2005, according to analyst Michael Youngblood at Friedman, Billings & Ramsey Inc., with a slight dip, to $521 billion, expected in 2006.
Many of the lenders were based in Southern California, including the Ameriquest group of companies in Orange and Irvine-based New Century Financial Corp., which in 2004 and 2005 were the largest sub-prime mortgage lenders. (Wells Fargo Inc. and HSBC Group, major banking concerns with sidelines in sub-prime home loans, held the top two positions last year, according to data tracker Inside B&C Lending.)
Wall Street firms help the independent lenders pool hundreds of millions of dollars in mortgages and then distribute the payments on those loans to back various tiers of bonds. Safety-minded investors buy top-rated bonds that are repaid first or are insured, but Wall Street also creates high-yield, riskier bonds for hedge funds and other aggressive investors.
As interest rates fell and home prices soared earlier this decade, profits abounded for the sub-prime lenders, Wall Street firms and bondholders alike, and scores of small companies sprung up to mine sub-prime gold.
The lenders' profits have dissolved, however, as the housing market lost steam, rates moved higher and competition became brutal. Analysts now say there are far more such lenders than the market will support.
One solution for these lenders is to sell. And starting last year, major bond houses such as Bear Stearns, Lehman Bros. and Morgan Stanley began purchasing struggling sub-prime lenders to ensure themselves a flow of mortgages for the bond pipelines.