uding 300 locally, that their jobs will end by late September.

Across the country, hundreds of employees at mortgage companies such as Accredited Home Lenders of San Diego, First Magnus Financial of Tucson, Ariz.; American Home Mortgage Investment of New York; and National City Corp. of Cleveland face similar uncertainty as their companies have stopped taking new business, shuttered operations or filed for bankruptcy.

While economists talk of moral hazards and question whether the Federal Reserve should cut interest rates and "bail out" irresponsible lenders, Aegis' story is a grim reminder.

The victims of the mortgage meltdown aren't just the borrowers unable to make escalating loan payments. They're also the employees of the mortgage firms who can find themselves out of work with little warning as credit evaporates and mortgage companies implode.

Never told us'

Karla Castillo worked as a collections counselor at Aegis for two years. On Aug. 7, she said her supervisor called a meeting to tell employees they would be let go in 60 days or less.

A week later, the company filed Chapter 11. Castillo said she was interviewing for another job and learned of the filing from her prospective employer.

"They never told us what was going on," she said of Aegis.

An Aegis spokeswoman declined to comment.

Frustrated by the uncertainty of the bankruptcy and a letter saying the company was terminating its medical plan for employees, she quit last week.

"You can't wait for the courts," she said. "Your rent can't wait."

There is, of course, a painful irony to not being able to pay your rent because others can't pay their mortgages.

Since 1993

This wasn't the ending that Thompson envisioned when he and two partners founded Aegis in 1993 with the idea of building a full-service mortgage bank.

After growing rapidly in the 1990s, the firm was sold to Cerberus Capital Management in 1998. Thompson retained a 15 percent interest.

Flush with $45 million in financing from the private equity firm, Aegis took advantage of the late '90s subprime implosion, buying other firms on the cheap.

It got a boost in 2002, when the Fed slashed interest rates, spurring demand for housing.

By 2005, the company had 3,800 employees in more than 100 locations, up from 150 employees in nine locations in 1999. Aegis was handling $20 billion in loan originations a year, Thompson said.

By then, interest rates were rising again, and he worried that the large loan volume left the company vulnerable to a liquidity crunch. He said he persuaded Cerberus to take the company public, but by the time the offering was drawn up, the market had soured.

Higher interest rates were crimping Aegis' profits, and the underwriters refused to do the deal, he said. And the company began reducing expenses and employees.

Bickering with Cerberus

Thompson had a falling-out with Cerberus and left Aegis in November. He later sued the private equity firm, accusing it of mismanaging Aegis and squandering its chances to go public.

Thompson told me last week if Cerberus had gotten the offering done sooner, it might have generated enough liquidity to keep Aegis in business.

Cerberus declined to comment on Thompson's statement or the lawsuit. It has said Thompson's complaint has no merit.

In a statement, the company noted it has injected $120 million into Aegis in the past nine months, half of that in the past 90 days. It also said it hired counselors to help employees find other jobs and health benefits.

Technically, Thompson still owns 15 percent of Aegis, though the bankruptcy probably will wipe that out.

Cerberus, of course, has more important deals on the table, such as its recent acquisition of Chrysler.

Unforeseen collapse

I asked Thompson if he thought the mortgage industry ignored too many warning signs of a meltdown. In other words, could the misery of the past month have been avoided?

"I don't think any of us saw the depth to which the market would sink and the speed with which it would happen," Thompson said. "You really have just a collapse in global liquidity for the mortgage market."

Thompson said it's been painful watching the demise of the company he helped found.

"I don't think the Fed or people in general realize how completely the mortgage industry is seizing up at the moment," he said.

Castillo realizes. So do thousands of others like her across the country who must endure the financial fallout of the mortgage industry's implosion.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.