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House of Credit Cards

The hazards of an economy built on bad loans.


Why are banks willing to lend money to people who cannot afford to pay them back? If you're curious as to why the mortgage market seems to have suffered a meltdown of late, and what this says about how banks are manipulating your money, this is the question you have to ask.For the answer, look at Enron-Ken Lay's house of cards is a scarily apt analogy for the modern mortgage machine. In both cases, borrowers and lenders engaged in the most irresponsible behavior imaginable: the bankers investing vast sums in questionable loans because of their obscene profitability and borrowers suspending their own disbelief because of the bankers' assurances. Americans will pay nearly any price to achieve the American Dream, and bankers will charge nearly any price, even a ruinous one. For a time, loaning lots of money to people who couldn't really afford it was a win-win situation: The banks got rich while their customers felt as if they were getting rich. But, as was true in Enron's case, and will be true in the case of the mortgage market, these were simply delusions of grandeur. And if the bubble bursts, anyone who owns a house or invested in a mutual fund is going to feel the pain.The big difference between the mortgage business and Enron is that Enron executives had to invent the schemes that guaranteed its spectacular demise. The bankers just cut and pasted those schemes onto mortgage documents, creating whoppers like "loan-to-value," where a house could be appraised before it was even built. Most notorious were the "liar loans," which give the banks an incentive not to verify their customers' ability to pay and their customers an incentive to delude themselves. This is worse than just nodding and winking. A recent New York Times article pointed out that 90 percent of liar loan applicants had-surprise-lied about their income. The legal term for such behavior is fraud.
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What does it say about the American Dream that it is now built on lying?
Two years ago, I interviewed a high-end realtor in Las Vegas, then the nation's hottest real-estate market. As we drove by 10,000-square-foot McMansions in her used Mercedes s500, she glowingly described the bankers as "very creative." They were helping her and her clients to live like millionaires. She drove me to the site of her own massive dream house, which would boast an elevator, a wine room, and twin utility rooms. Why she needed these things, she could not explain. I wonder, with housing prices falling and the Federal Reserve suddenly reminding banks to do their jobs-i.e. loan responsibly-how long will she stay smiling?What does it say about the American Dream that it is now built on lying and encouraging people to lie? When I asked a mortgage broker in Los Angeles, he defended the industry's lack of ethics as realism. Lying, he reminded me, has become the only means by which most Americans can afford to buy a house-the only way we can have our dream. The banks are well aware of the lies, so the lies aren't really lies. But will they be held accountable when this house of cards collapses, I asked. He shrugged his shoulders as though he had never even considered the possibility that one day his signing off on all of these fraudulent misrepresentations of fact might be considered unethical or even criminal. I fear for the mortgage broker, though I don't approve of what he's been doing. I don't fear so much for the bankers. A federal judge recently ruled that although banks had "aided and abetted" the Enron fraud, they could not be sued by investors because they were merely making the whole grand fiction seem more plausible.I received my first credit card as I began classes at the University of Pennsylvania-an institution founded by the godfather of thrift and sobriety, Benjamin Franklin. The card was embossed with Franklin's words: Leges Sine Moribus Vanae-laws without morals are useless. The courts may have just underlined Franklin's point by giving the banks a free pass on Enron. It remains to be seen who will be held accountable for the much larger fraud in financing the American Dream. My money says that the investors-and that's you and me-may lose again.