Bank of America’s $4.1 billion buyout of Calabasas-based Countrywide Financial Corp. announced earlier this month puts the exclamation point on perhaps the most rapid meltdown of an industry in Los Angeles County history.

For five years, mortgage finance was one of the fastest growing industries in Southern California, creating tens of thousands of jobs, pouring billions of dollars into the local economy and making Los Angeles and Orange counties the nation’s leading center of mortgage finance.

And faster than it came, it went.

Santa Monica-based Fremont General Corp., Orange-based Ameriquest Mortgage Co. and Irvine-based New Century Financial Corp. are all out of the mortgage lending business, at least as they practiced it. Countrywide has been whacked, and Pasadena-based IndyMac Bancorp is struggling, laying off a quarter of its workers last week.

Smaller mortgage loan originators have also closed up shop as have hundreds of mortgage brokers. By the end of 2007, nearly 16,000 jobs in the mortgage finance sector mostly from Southern California had disappeared, according to a MortgageDaily.com study.

“This is one of the most rapid collapses of an industry that we’ve seen here in Southern California,” said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange. “It was much more rapid than anybody could have anticipated.”

But it is not wholly unprecedented.

Indeed, the events of the last 18 months bear striking parallels to another infamous chapter in mortgage finance: the savings and loan debacle of the late 1980s.

During the heyday of savings and loans, many of the largest operations were here in Los Angeles and Orange counties: Home Savings, Great Western Bank, Glendale Federal, Cal-Fed, Coast Federal Savings, Columbia Savings and Loan and Lincoln Savings and Loan.

The common denominator? Both subprime lenders and the S & Ls; were drawn to Los Angeles and Southern California’s huge housing market and rising land values, where issuing mortgages en masse can mean big, big money.

“With such a huge housing market and rising land values, a disproportionate amount of the home loan business was located here,” said Charlotte Chamberlain, litigation consultant with the Analysis Group who 20 years ago was an executive with Glendale Federal Savings.

Role of deregulation

The mortgage industry’s rise was fueled by an unprecedented combination of low interest rates, lax lending standards and an explosive growth in subprime and other non-traditional loans with ever-rising home prices acting as the glue that held it all together.

But in late 2006 home prices stopped rising, delinquencies began to climb and the entire industry collapsed like a giant house of cards. In wave after wave of panic and cuts, the industry titans spiraled down. Fremont General was forced out of the subprime mortgage lending business by federal regulators. New Century declared bankruptcy after a brief and spectacular flameout. Ameriquest, on the verge of bankruptcy, sold its lending unit to Citigroup Inc.

And then there is Countrywide, which in the space of seven years had rocketed to become the nation’s largest home lender. But last year, Countrywide announced nearly 20,000 layoffs, twice faced rumors that it was nearing bankruptcy, twice arranged billions of dollars in emergency financing and saw its stock price plummet more than 80 percent. It ultimately decided to sell itself off at a bargain price to Bank of America rather than face what looked like a total meltdown.

Similarly, the savings and loan industry really took off after a round of deregulation in the late 1970s and early 1980s that removed many of the shackles on the ability of savings and loans to make investments.

What followed was a wave of disastrous land deals and investments that pushed many of the lenders to the brink of collapse. The most spectacular was Irvine-based Lincoln Savings, headed by Charles Keating, which took in nearly $300 million from 21,000 investors, including many senior citizens who had invested their life savings. After the investments soured, Lincoln was taken over by the federal government in 1989 at a cost of nearly $3 billion to taxpayers. Keating was charged with fraud and racketeering and ultimately sentenced to a total of 22 years in prison. He served nearly five years before his convictions were overturned.

While many local institutions survived this debacle, they did not survive the industry consolidation that followed in the 1990s. Glendale Federal, for example, was bought up by Golden State Bancorp, which also owned Cal-Fed; Golden State in turn was bought out by Citigroup and Great Western and Home Savings were ultimately bought out by Washington Mutual Inc.

Meanwhile, veterans of the savings and loan industry moved on to other mortgage finance firms, like Countrywide, or started their own. But, thanks to the severe local recession and sweeping aerospace job cuts that kept housing prices suppressed, the mortgage industry gained little traction until the late 1990s.

Mortgage boom

By that time, other forces were at work. Spurred by federal policies to encourage more homeownership, mortgage lenders developed an array of new financing products, including interest-only loans, option adjustable rate mortgages and especially loans to subprime borrowers at much higher interest rates. The idea was to first entice borrowers with little or no down payments and low initial interest rates.

More importantly, the industry had changed. Loan originators were no longer holding on to their loans and servicing them; instead they were selling them off in giant packages to the secondary market. These mortgage-backed securities were snapped up by Wall Street firms and other investors, creating what appeared to be a perpetual market for mortgage loans.

Again, Southern California emerged as a center for these mortgage loan originators. Meanwhile, the region’s high home prices meant that borrowers had to stretch more to buy the homes, which fueled the formation of ever-more-creative financing mechanisms.

“Southern California is obsessed with real estate deals and we love it,” said Christopher Thornberg, principal with Beacon Economics in Los Angeles. “Where land values are high, there’s lots of money to be made and that’s exactly what we saw with this latest cycle.”

Of course, the cycle eventually spun out of control. Speculators moved in, snapping up homes with subprime loans, making a few cosmetic improvements and then trying to flip them for a profit a few months later. “It all sort of spiraled up in a classic bubble phenomenon,” Thornberg said.

Smaller Industry

Local economists and real estate experts expect the carnage to continue through most of this year. For starters, thousands more jobs are likely to be shed as Bank of America completes its purchase of Countrywide. “More consolidation is coming. We haven’t seen the bottom yet,” Thornberg said.

As for the future of the local mortgage finance industry, few expect it to recover for at least several more years.

“First, housing prices have to start rising again. That has to happen for at least a couple of years before we see an expansion of the mortgage sector kick in,” said Adibi, who noted the last real estate downturn lasted four years.

And even when the housing sector does turn up again, the mortgage finance sector may only return to the region in limited form. “The industry is changing. Instead of all these mortgage houses like New Century and Countrywide, we’re finding that the big banks are moving in and taking over the business. And those big banks are not based here. Mortgage originators will probably not be in Southern California anywhere near the numbers they were at last year,” said Stephen Cauley, director of research for the Ziman Center for Real Estate at the University of California Los Angeles.

Especially hard hit could be the cadre of mortgage brokers who specialize in pitching loans to the major lenders. Much of that business could be taken on by banks.

Of course, the next upturn may bring more mortgage finance innovation and startups that can’t even be imagined today. That’s what happened after the collapse of the savings and loan industry nearly 20 years ago as many industry veterans ended up in places like Countrywide and New Century. But at least at the outset, any such firms will likely be small niche players.

“We may not reach the mortgage finance employment peak of 2005-06 ever again, and even if we do, it won’t be for the foreseeable future,” Adibi said.