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Crooked Lenders Are to Blame for a Variety of Economic Woes

Crooked Lenders Are to Blame for a Variety of Economic Woes

“Why are the most risky loan products sold to the least sophisticated borrowers? The question answers itself. The least sophisticated borrowers are probably duped into taking these products. The predictable result was carnage.”
- Edward M. Gramlich, former Federal Reserve official

November 21, 2007 —

By now you've no doubt heard the words "subprime" and "credit crisis" bandied about in the media in relation to the recent instability on Wall Street, but the tragedy of this story lies in the foreclosures and financial ruin facing millions of Americans today. Buoyed by a housing bubble, subprime lenders offered loans to high-risk borrowers at interest rates purposefully designed to start off low but increase over time to levels that would theoretically make the debt profitable for whoever held it. Subprime lenders would then sell the debt to larger financial institutions like Citigroup or Bear Stearns, who reported "expected" earned interest as profit despite the high likelihood that many of the borrowers—who in some cases didn't even have to provide proof employment to get these loans—would default.

When the housing bubble burst this year the whole chain of shady dealings being public knowledge, leading to a major stock market decline, a credit crisis, and inflation—not to mention hundreds of thousands of people losing their homes. Though it's arguable that the stock market was inevitably headed toward a slow down, the total economic ramifications caused by this kabal of crooked lenders and investment firms makes Enron look like a street corner three-card monte operation. The spotlight has now been turned on the seedy underbelly of the lending industry.

The SEC, the Justice Department, and state attorney generals are all now investigating malfeasance on the part of lenders and their financial backers. In New York State, Andrew Cuomo seems to have come across yet another fraudulent practice in this industry: independent appraisers colluding with lenders to inflate home values.

In the United States, there aren't a whole lot of options for those seeking an ethical mortgage. But investors who haven't already been burned by Citigroup, Bear Stearns, Countrywide, Washington Mutual, or a whole host of other companies that seem to have had a hand in this scandal, can register their displeasure by keeping their money out of these companies.

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