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First Magnus Financial Corp. made a sizable percentage of high-cost loans amid the housing-market explosion of 2005, joining a national pattern of risky lending before it collapsed last month, an Arizona Daily Star analysis found.

First Magnus' high-cost, high-risk lending was especially common in Pinal and Maricopa counties, the analysis shows. In Pinal County, nearly one in four loans the company made was nontraditional, compared with one in 10 the company made nationwide.

The data suggest that First Magnus contributed to the nationwide proliferation of subprime and limited-documentation, "Alt-A," loans, which led to this year's mortgage crisis and in turn brought about the company's collapse Aug. 16. At least 550 Tucsonans lost their jobs in the failure, as did about 5,000 employees outside this area, and Tucson lost its biggest locally based, nationwide company.

First Magnus executives and former employees said the company sold few mortgages considered subprime — loans to borrowers with credit scores below 620 — but did significant amounts of Alt-A, also called "alternative documentation," loans. Those loans require little or no proof of borrowers' assets or income.

"We jokingly called them 'liar loans,'" said Anita Luciano, a former First Magnus underwriting manager in Houston. "A borrower can state their income and state their assets — and you approve their loans."

First Magnus spokesman Gary Baraff said subprime loans have always made up less than 1 percent of all mortgages underwritten by the company. Alt-A loans, however, reached a peak of about 50 percent of the company's loans in the last quarter of 2006, Baraff said.

In a written statement, Baraff said the Alt-A business was a reflection of the market at large. Much of First Magnus' business was in wholesale lending, the underwriting of loans secured through outside brokers.

"The company's wholesale product percentages mirrored what was transpiring on the national level with borrowers and originators," he said.

First Magnus filed Aug. 21 for Chapter 11 bankruptcy protection and has plans to liquidate itself. Officials said the company had trouble selling its loans to investors.

The Arizona Daily Star analyzed a database of more than 36 million mortgage applications in the United States in 2005, the most recent year for which complete data are available. That information, reported to the federal government, includes the loan application's dollar amount, the approved interest rate, whether the loan was made and if it conformed to the standards of government-sponsored mortgage buyers, such as Freddie Mac and Fannie Mae.

Among the Star's findings:

● The greatest percentage of First Magnus high-cost loans, in counties with more than 400 of the company's mortgages, were made in Pinal County. About 23 percent of the company's loans were high-cost, non-traditional mortgages.

● First Magnus originated 2,842 high-cost loans in Maricopa County for 2005, compared with 17,234 total loans there. That number of high-cost loans was the largest by First Magnus for any U.S. county in 2005.

● While First Magnus sold a greater percentage of high-cost loans in those two counties, other lenders had similar or higher percentages of such loans. That includes Melville, N.Y.-based American Home Mortgage Investment Corp., 40 percent of whose loans made in Pinal County were high-cost, compared with about 22 percent of its total mortgages nationwide. American Home filed for Chapter 11 bankruptcy protection Aug. 21.

● First Magnus' high-cost lending tallied about 11 percent nationwide. Overall, high-cost, nontraditional loans accounted for about 26 percent of all mortgages across the country that year.

● Although First Magnus may have been a smaller lender nationwide, it was one of the biggest in the state. First Magnus ranked No. 3 in number of originated loans in Arizona, at 25,947, the data show. It was surpassed only by No. 2, Countrywide Home Loans, and the largest, Wells Fargo Bank N.A.

The expansion of riskier loan products with higher interest rates came earlier this decade when Treasury yields were at historic lows, said Christopher Lamoureux, head of the University of Arizona's finance department. The desire for higher profits, coupled with the ability to make and sell loans to investors on Wall Street, provided strong impetus for making riskier loans, he said.

"We saw a lot of price increases going on. I think a lot of investors and potential homebuyers wanted to jump in and get on that bandwagon," Lamoureux said. "A whole industry was springing up to help people use rapid increases in some of the local housing markets to try to turn profits," he said, referring to the mortgage industry.

Some former First Magnus employees said Alt-A loans were often used by borrowers who were unable to qualify for traditional mortgages.

"There were people getting into houses where no way under the normal lending practices could they get a loan," said Beryl Poole, a former First Magnus underwriting manager in Fort Lauderdale, Fla.

Poole said it wasn't uncommon for some First Magnus employees in her office to intentionally overstate incomes or assets on Alt-A applications to qualify.

"I had many people say that to me, 'Just change the income. It's OK. We've always done that,'" she said. "I was very, very afraid of the misrepresentation that was there."

First Magnus spokesman Baraff said the company enforced strict policies against misrepresentation on loan applications, and took swift action, including firing employees, when management learned of problems.

"With 350 branches and almost 6,000 employees, there were instances reported and the company always reacted quickly," he said in a statement.

Eventually the market overheated.

By 2005, the Phoenix-area housing market, including Pinal County, went from a modest 16 percent overvaluation to a robust 45 percent overvaluation, according to a study by Global Insight and National City Corp. The study compares real sales prices to market factors such as population density, mortgage rates and incomes.

The tipping point for the Phoenix real-estate market came in late 2005 when "builders started putting up too much property," said Anthony B. Sanders, a finance professor at Arizona State University.

Thus, lenders figured they could "loan to people with crummy credit" and make a "crummy loan," risking that homeowners would default down the road, he said.

"It was just a very naive forecast of the market," Sanders said.

In the weeks leading up to First Magnus' collapse, employees said they were urged to stop writing Alt-A loans because secondary investors viewed them as too risky. Employees said they were told to stick to conventional loan products and borrowers with strong credit scores.

"We are all guilty of pushing crazy stated and NO DOC loans that were time bombs ready to go off and kill the borrower but leave the house standing," First Magnus Mid-Atlantic Regional Manager Raymond H. Fraser Jr. said in an Aug. 3 e-mail, forwarded by a former First Magnus employee. "The market is now realizing that we and others should have been a little suspect of some of these products we all sold and loved."

But Poole, the former First Magnus underwriting manager in Florida, said the change came "way too late in the picture."

"The word was that we're supposed to be careful," Poole said. "That was never advertised previously."