Dec. 18 (Bloomberg) -- One week in 2002, Daniel Sadek was $6,000 short of covering the payroll for his new subprime mortgage company, Quick Loan Funding Corp. So he flew to Las Vegas and put a $5,000 chip on the blackjack table.
``I could have borrowed the money, I suppose,'' Sadek says.
That wouldn't have been his style. With his shoulder-length hair and beard, torn jeans and T-shirts with slogans such as ``Where is God?'' Sadek looked more like a guitarist for Guns N' Roses than a mortgage banker.
Sadek says he was dealt a jack, then an ace. Blackjack. He would make payroll. Quick Loan Funding, based in Costa Mesa, California, would survive and, for a while, prosper as one of 1,300 mortgage lenders in the state vying to satisfy Wall Street's thirst for subprime debt.
As home prices rose and hunger for high-yield investments grew, Sadek found his niche pushing mortgages to borrowers with poor credit. Such subprime home loans grew to $600 billion, or 21 percent, of all U.S. mortgages last year from $160 billion, or 7 percent, in 2001, according to Inside Mortgage Finance, an industry newsletter. Banks drove that growth because they could bundle subprime loans into securities, parts of which paid interest as much as 3 percentage points higher than 10-year Treasury notes.
``I never made a loan that Wall Street wouldn't buy,'' Sadek says. He worked hard to build the business, he says, and the company did nothing illegal.
U.S. Pays the Bill
In 2005 and 2006, New York bankers expanded the market for mortgage-backed securities by creating new subprime derivatives contracts. The derivatives, which amplified the risks of the underlying mortgages, were sold to banks and institutional investors. When borrowers started to default on high-yield, high- risk subprime mortgages by the thousands, the values of these leveraged securities plunged.
An index of subprime loans made in the second half of 2005 fell to as low as 21.83 cents on the dollar from a high of 102.19 cents. It's now at about 30 cents.
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`Everything's Not OK'
``You go to soccer games, and everything's great with the other parents,'' Aultman says. ``Nobody knows it, the wife doesn't know it, the kids don't know it, but their old man is in trouble. I put up a façade that everything's OK. Everything's not OK.''
Aultman is trying to sell his house, but three others within sight of his driveway also have for-sale signs.
``I'm embarrassed,'' Aultman says. ``I made a deal with the devil. I didn't know what I was signing.''
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