"It was a neat time. We thought it was just one step in a long-term plan," said Robert G. Partlow, Fieldstone's former chief financial officer, who resigned a few months later because his family didn't want to move from Richmond, Va., where he had been based, he said.
"We didn't think we were going to take over the world. We were trying to do the business the right way, where we balance credit risk and have a good balance sheet."
Still, there were cautionary signs even back then, Partlow acknowledged. The company saw a decrease in its net interest margin - the difference between interest earned on loans and expenses. It also watched its gain on mortgages as a percentage of sales slip from 3.4 percent in 2002, to 3 percent the next, to 2.5 percent in 2004.
The pressure was on to make more loans, the company said in SEC documents. Meanwhile, Wall Street firms were buying mortgages made to borrowers with riskier profiles to keep volume high. Most lenders went along because they thought they were passing off the risk.
The subprime business is typically more profitable than conventional lending. Because the lenders provide loans to people with unstable financial histories, they charge higher interest rates.
The industry helped fuel the biggest jump in homeownership since the post-war boom of the 1950s, providing more lower-income families with increasingly inventive home loans.
At Fieldstone, the loan portfolio consisted almost entirely of adjustable-rate mortgages and most had a temporary "interest only" feature, allowing lower initial monthly payments. In general, a Fieldstone borrower would see the interest rate adjust upward after two years, and even larger payments after five years when principal was added to interest.
More than half of Fieldstone's subprime borrowers were allowed to provide little or no documentation of their income, according to SEC filings. Instead, the company relied on credit scores, property values and how the loan affected the borrower's debt levels. These "stated income" mortgages were originally designed for self-employed borrowers but became more widely used and known as "liar loans."
Fieldstone also made roughly half of its subprime loans in the frothy California market. And the company actively sought borrowers with a history of not paying bills and high debt, using mass marketing campaigns and customized mailers to reach them.
