The financial risks taken by Arizona home buyers and lenders in the housing run-up came home to roost in last week's financial crisis.

As Tucson, Phoenix and Pinal County struggle with excesses of home inventory and painful drops in values, big financial companies that helped inflate the bubble are suffering, even up to venerable Wall Street institutions such as Lehman Brothers and Merrill Lynch.

"It was a vicious cycle of greed," said University of Arizona finance professor Christopher Lamoureux, referencing home buyers, lenders and Wall Street investors, and others who contributed to the situation.

Starting points for the crisis can be found throughout Central and Southern Arizona, where prevalent risky-mortgage lending helped people stretch themselves too far in their real estate purchases. Whether hoping to take advantage of skyrocketing home values by investing, or simply hoping to buy a house on insufficient income, many buyers in Arizona inadvertently set themselves — and numerous others in the economy — on a path toward financial disaster.

The disaster arrived with sinking property values and spiking foreclosures, as borrowers failed to make their payments.

In April, the New York Times Magazine profiled one Pinal County town, Maricopa, as a poster child for the real estate meltdown. Maricopa real estate broker Shawn Schlegel said almost all of the resales in the area are distressed or foreclosed properties, and property values have plummeted since the high point around 2006.

"The same house I sold at the peak for $265,000, I sold for $110,000 four or five months ago," he said.

One local casualty of the downturn, former Tucson mortgage lender First Magnus Financial Corp., sold at least $284 million in loans to Lehman Brothers on which buyers failed to make even the first or second payment, according to First Magnus bankruptcy court filings. Lehman Brothers collapsed last week because of its investments in bad mortgage loans.

In the weeks and months ahead, policymakers and analysts will be wrestling with questions about how the crisis was allowed to happen and how to mess could be fixed.

"When housing prices were going up, everyone forgot lessons of the past," said Anthony Sanders, an Arizona State University finance professor and a former New York mortgage-backed-securities researcher. "It's like a firestorm that feeds on itself."

About one out of every three mortgages made in Arizona at the peak in the market in 2006 was a high-interest-rate, high-risk loan, according to a Star analysis of public lending data collected under the Home Mortgage Disclosure Act. Nationwide, the ratio was closer to one in four.

Higher interest rates indicate loans are likely subprime or so-called "Alt-A" loans, which require little or no proof of a buyer's income.

Looking strictly at total dollar values, without taking population into account, Maricopa County was the country's second-highest-grossing county in high-rate loans made from 2005 through 2007, according to the data. About $42.7 billion in high-risk mortgages were made in Maricopa County during those years. Los Angeles County took the top spot with $96.4 billion. Pima County was No. 53 with about $5.2 billion.

The list of lenders that made the most high-rate loans in Arizona at the peak of the market reads almost like a list of tombstones for collapsed lenders — with names including Countrywide Financial and Lehman Brothers Bank, along with First Magnus, a former local lender that did heavy business in Alt-A loans. First Magnus shut down abruptly and filed for bankruptcy liquidation in August 2007, laying off about 5,500 employees nationwide.

Wells Fargo was the only traditional bank that made the list, but spokesman Jay Lawrence said the "vast majority" of loans made by the bank at that time were not high-rate.

Many of the riskier loans were made possible through investors on the secondary mortgage market, finance experts said. While traditional mortgages are typically sold by the lenders to government-sponsored entities Fannie Mae and Freddie Mac, the more creative loans were bought by investment banks such as Lehman Brothers and Bear Stearns, experts said. Both of those firms have collapsed.

Sanders, of ASU, traces the rash of risky lending back to government initiatives to increase homeownership among lower-income families — people who probably would not qualify for loans under traditional guidelines. Without regulation in place to stop them, subprime and other alternative loans flourished, he said.

"We opened the floodgates for this and had absolutely no damage control," Sanders said.

In the path from borrowers to investors, specialty lenders called mortgage banks sometimes stepped in as middlemen, using credit lines from big banks to make mortgages and selling them to investment banks, said Cory Forbes, director and head trader for New Jersey-based Biltmore Capital Group, a distressed-loan buyer. The investment banks sold the mortgages on securities markets.

First Magnus, a mortgage bank, abruptly halted business last year when the market for its mortgages dried up and the big banks froze its ability to borrow. Representatives from First Magnus would not comment.

Everything worked fine as long as property values were rising, but problems emerged when values started to fall, finance experts said. Homeowners who could barely afford mortgage payments suddenly had to cope with rising adjustable rates and a limited ability to sell their homes, they said.

Falling values meant they also could not refinance.

As borrowers fell behind on their loans, the state's foreclosure rate rose to one of the highest in the nation, coming in at No. 3 behind Nevada and California in August, according to RealtyTrac, a foreclosure information service. Second-quarter data from the Mortgage Bankers Association shows that 3.3 percent of all loans in Arizona were in foreclosure and one in 20 was "seriously delinquent" — more than 90 days past due.

"A lot of these foreclosures are people who bought homes when values were skyrocketing," said Jeannine Cataldi, senior economist at Global Insight, a financial analysis firm.

Foreclosure filings for the first eight months of 2008 in Pima County are more than double what they were for the first eight months of last year, RealtyTrac said. A total of 4,860 foreclosure filings have occurred so far in Pima County this year, the data said. Pinal and Maricopa counties are posting similar increases.

Observers are pointing fingers at government, lenders, Wall Street, real estate companies and borrowers.

Sanders, who previously served as director of mortgage-backed-securities research at Deutsche Bank, blames speculative borrowers.

Schlegel, the Maricopa real estate broker, blames "the banks — because they make the rules."

Maricopa Mayor Anthony Smith said he simply thinks "it was greed" by everyone. "The practices just seemed to be doomed for a collapse," he said.