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SOUTHERN ARIZONA ENDODONTICS I
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In the weeks before Tucson-based First Magnus Financial Corp. collapsed, executives were working around the clock to forge deals so lenders, including now-defunct Washington Mutual Inc., could take over billions in loans from the troubled mortgage lender, a review of U.S. Bankruptcy Court documents show.

The deal later allowed for Seattle-based Washington Mutual to keep more than $1.1 billion in mortgage loans that it bought from First Magnus.

Some of those same assets of WaMu, as Washington Mutual is known, were likely among those seized by the government on Thursday in the biggest bank or thrift collapse by far in U.S. history.

The episode shows how First Magnus and other lenders like it not only contributed to the proliferation of nonprime loans, but also how such risky lending contributed to WaMu's downfall.

Critics say the nonprime-mortgage crisis is to blame for the unhealthy state of the U.S. financial system, as Congress debates a $700 billion bank-bailout plan, parts of which some congressional leaders roundly rejected on Thursday.

In bankruptcy filings, former First Magnus CEO G.S. Jaggi told the U.S. Bankruptcy Court for Arizona in October 2007 that his company owed more than $1 billion in obligations to Washington Mutual for funded loans.

The obligations were made under a so-called warehouse lending arrangement, in which mortgage originators write loans and sell them on the secondary market.

The $1 billion did not include more than $60 million First Magnus itself contributed, which the mortgage industry commonly refers to as "haircuts."

First Magnus is one of many lenders that were involved in warehouse lending, and First Magnus conversely did not just deal with WaMu for funds.

Bank filings show the Tucson company, which collapsed in August 2007, had about $29 million in such funds from Countrywide Financial Corp., $198 million from UBS AG and $42 million from Merrill Lynch & Co. Inc.

Christopher Lamoureux, the head of UA's finance department, said WaMu "relied heavily on stand-alone origination firms, like First Magnus, to fill up its mortgage pipeline."

"Essentially, both are victims of the exact same storm," the professor said. "This all could have been prevented if traditional lending standards could have been applied."

Nonprime loans — subprime mortgages or loans made with no proof of income — accounted for about $43.8 billion of Washington Mutual's nationwide lending from 2005 through 2007, an Arizona Daily Star review of federal mortgage data shows. That accounts for about 12 percent of overall lending during that period.

Still, another expert said WaMu's collapse is part of a larger issue of subprime lending in some Western states — including California, Arizona and Nevada — that had high rates of first-payment defaults.

"I would put WaMu collapse down to this: It is an example of West Coast banks that engaged very heavily in lending on the West Coast in subprime loans," said Anthony Sanders, a professor at the W. P. Carey School of Business at Arizona State University and the former director at Deutsche Bank in New York.

The banks, he said, "simply didn't have sufficient capital to cover losses that some say were fully expected."

"Warehouse lending did have an impact, but the problem was that financial institutions didn't always apply underwriting standards," San-ders said.

First Magnus reported having assets of $1.87 billion and $1.65 billion in liabilities, according to court documents.