November 24, 2008

ODIOUS DEBT:

Eat the Loan Sharks!: Let's solve the subprime mess by going after lawbreaking lenders. (Ray Brescia, Nov. 24, 2008, Slate)

In early October, Bank of America quietly entered into the largest settlement in history to make amends for predatory lending, putting up more than $8 billion to rescue borrowers with faulty loans from Countrywide Financial, a notorious subprime lender recently purchased by the bank. As politicians and regulators haggle over the best approach to modify perilous mortgages and as millions of Americans fall deeper into delinquency, the Bank of America settlement offers a clear path out of the broader problem: Chuck the illegal loans and start over again, making the lawless lenders foot the bill.

Part of the backdrop here is dismayingly familiar. Explosive growth of subprime lending created perverse incentives that led to fraudulently inflated loan terms. What's less known is that some of these loans were priced higher based on the race of the borrower, with African-Americans and Latinos paying more, in secret, behind-the-scenes deals. Some of this activity will even turn out to have been criminal. There are more than 1,500 open FBI investigations into mortgage fraud, much of it concentrated in the subprime market.

At the same time, many delinquent borrowers don't know that the terms of their home mortgages may have been the byproduct of fraudulent, discriminatory, or criminal behavior by mortgage brokers and lenders. Before we end up spending billions to rescue subprime borrowers, we should figure out which loans were the products of illegal behavior, rescind them, and rewrite them on terms that are fair and legal. If there is a cost associated with this process, let lenders pick up the tab, which is precisely what Bank of America is doing. This would save taxpayer money by reducing the number of loans that the government would pay to modify. It would also help to stabilize the housing market and lay the blame for much of the subprime crisis at the feet of those most responsible: the lenders who acted like predators.


While the Right rants about the undeserving getting loans...

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Posted by Orrin Judd at November 24, 2008 7:16 AM
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