Page last updated at 23:27 GMT, Wednesday, 9 September 2009 00:27 UK

'Some didn't know they were getting a loan'

By Claire Bolderson
BBC News, Orange County, California

Eileen Loiacono sips her iced water, laughs and says maybe, when she has time one day, she'll write her life story.

Eileen Loiacono
They said things like 'if you decline this mortgage I'll have you taken care of'
Eileen Loiacono

It would make some eye-popping reading.

Loiacono was a mortgage underwriter - deciding who her firm should lend to - at the height of the subprime lending bonanza.

What's more, she was working in Orange County in southern California, once the subprime capital of the US.

Five years ago, most of the leading subprime lenders had their headquarters in the area. The county was stuffed with banks specialising in risky loans to people with little or no income and bad credit histories.

Eileen Loiacono saw how they did it. It was her job to look at the prospective borrowers' files and assess whether they'd be able to repay their loans.

Lending frenzy

How many of the applications that crossed her desk looked like good prospects? "About 30%," she says.

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As for the rest: "There were people who didn't even understand they were getting a loan. They couldn't read the documents, somebody had just approached them and said hey, do you want a home?"

Now working for a bank in Corona, a small town in the parched brown hills east of Orange County, Ms Loiacono says she did her best to bring some sense to the lending frenzy.

She would try to turn down loan applications that looked too risky but the pressure from mortgage brokers and bank bosses was overwhelming.

They started offering incentives to the wavering underwriters. Promises of trips to resorts on the California coast were common. "They offered cars and watches and purses," she says, "the list goes on".

Did she ever succumb to temptation?

Eileen Loiacono throws back her head with a loud laugh. "I was probably threatened more than I was offered anything" she says.

And not just threatened with losing her job. It was more menacing than that.

She was told her car would be vandalised if she tried to reject an applicant.

And worse. "They said things like 'if you decline this mortgage I'll have you taken care of'. And some underwriters cars were scratched and stuff like that".

'Chain of blame'

Eventually the FBI were called in to investigate. Ms Loiacono left in disgust.

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But she says what she experienced was common in an industry she describes as having "no morals at all".

It was an industry that thrived in southern California while a buoyant economy attracted new residents in search of homes.

And in Orange County, one of the wealthiest parts of the state, there were plenty of entrepreneurs ready to give anything a try.

According to Mathew Padilla, author of a book on the birth of subprime - Chain Of Blame - the East Coast had Wall Street and its established means of making money.

The financial innovators of southern California were looking for their own cut of the action.

From his desk at the Orange County Register where he's followed every twist and turn of the crisis, Mr Padilla explains "to make your niche you have to be creative and a lot of folks here were very creative".

Spiral downwards

The results of their "creativity" are all too clear in the Orange County capital Santa Ana, where children play out on the streets on a warm summer evening and families congregate on their front steps and wait for the ice cream van.

On almost every one of the roads in the mostly Mexican neighbourhood at the heart of the city, there are boarded up houses with for sale signs outside.

A boarded up house in Orange County
Boarded-up houses are a common sight in Orange County

Estate agents show prospective buyers around empty properties that have been repossessed by banks.

At the height of the property boom, the area had one of the highest concentrations of subprime mortgages in all of California. House prices were rising fast but wages were not.

People who would never have been able to get on the housing ladder because of low incomes or poor credit histories were perfect targets for the creative new loans.

So were residents of Orange County who already owned their homes but wanted to use the equity to raise new funds.

Few had trouble borrowing. Many are still heavily in debt.

The pattern spread all over California which has one of the highest rates of home foreclosures in the United States.

The impact on the economy has been devastating. Unemployment, 9.7% nationally, is nearly 12% in California where a large component of economic growth was tied to the booming housing industry.

Now, in the places where the subprime industry took root, the fall-out is still being felt.

The big fear is that even people considered prime borrowers, those who were no risk at all, are going to default and trigger another spiral downwards.

With so many people losing their jobs, a lot more mortgages are likely to go unpaid.

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