Private greed and the economic crisis-part 2

As a specific example, I'll explain one specific loan package of which I am aware.  This was a loan in which the borrower paid nothing but the interest for 10 years.  Only after the 10 years were over would the borrower get to start paying down the principal...but shortly after starting to pay down the principal, there was a balloon payment.

In other words, for 10 years the bank gained everything and the borrower still owed exactly the same amount of principal.  Then, when the borrower could start paying down the principal, after a very few months s/he had to pay it all--likely a financial impossibility.

"In the old days," such a loan would have been legally impermissible, on the theory that it was "unconscionable," meaning that it wasn't fair.  But "banking reforms" made these loans legal, and thousands if not millions of people thoughtlessly signed on for them.  A large proportion of these people now find themselves losing their homes after having paid many thousands of dollars to their bank or savings and loan without having touched the principal.

At first, the banks foreclosed in these cases.  Now, because of the glut of foreclosed homes and the inability of people to pay back the loans, and with new federal incentives, the banks are putting more of these houses on the market as "short sales"--whereby the borrower loses his/her home, but the debt is wiped out once the house is sold. 

Then, there was also the practice of writing loans without examining the borrowers assets...another way to ensure that people will sign up for more than they can afford.  It also encourages speculation which encourages skyrocketing housing prices which encourages...until the bubble bursts.

And those institutions who thought they would simply take their money and run found themselves having taken a whole lot of money, but then being stuck with homes that, because of the burst bubble, were now worth much less than the principal (which hadn't been touched) and with borrowers who could no longer make their monthly payments.

I recently read that banks now own so much real estate through foreclosure that in some cases, they are finding it in their best interests to simply bulldoze the homes.

In many cases, they acquired these foreclosed homes by handing out loans almost impossible to pay, to people who couldn't afford to pay them.  And these loans were made because of the greed of the lending institutions.

Bad stuff.

We'll talk about private greed in multinational corporations in later blogs.

THE NEXT BLOG WILL BE some THANKS to some of those that have helped us.