Fieldstone did have quality controls in place. It had a way to detect house flippers and to guard against predatory lending when borrowers refinanced. It gauged the performance of underwriters monthly and cut ties with brokers whose loans went bad, according to regulatory filings.
But the company had a blind spot in its system. It couldn't track mortgages it originated before mid-2003 - or how often the loans defaulted or were paid off early - because it sold all of its loans, according to filings. So executives couldn't really know how well their quality checks would protect them from losses.
Industrywide data on subprime loan performance that Fieldstone executives could review was obscured by a backdrop of home prices that had been rising since the mid-1990s. Higher home prices masked problems because borrowers could sell with enough equity to cover the loan.
And in the heights of the subprime boom, pushing the lending envelope became the norm. Williams, who left Fieldstone in May, said she didn't worry about the lending guidelines at the time because brokers often complained they were too restrictive for them to compete. In retrospect, she said, the company didn't watch its operations or borrowers closely enough.
Steve Morberg, a former West Coast account executive, said the company often lagged behind the market with new products. "We were always told by management: `We're doing it right. We want to stay in business. We don't want to do those crazy loans,'" he said.
Expecting demand
Even when loan delinquencies began to rise and home appreciation slowed nationwide, Fieldstone executives said they saw opportunity. According to a presentation to investors in Las Vegas in January 2007, executives argued that competitors wouldn't be able to survive and that rising consumer debt would drive demand for subprime loans. They also said they would tighten lending guidelines and add to their sales force.
But at that time, they were getting margin calls from Wall Street lenders. And one of their peers, Harkness, was making waves.
The general counsel had been with the company since 2004 and had weathered her share of corporate upheavals. She was a lawyer at Enron Corp. before it collapsed and, according to one press account, she once questioned Andrew Fastow, the chief financial officer, about his now infamous off-the-book partnerships that landed him in jail for fraud.
