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Borrowers: Victims or Accomplices?

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Capitol One asks, "What's in your wallet?" Of course, they really don't care what's in your wallet, as long as it's a Capitol One credit card -- and only that. The less real cash in the wallet the better. That way you'll have to use their credit card to buy the stuff they know you'd buy if only you had the dough.

Who needs cash anyway when they'll lend it to you, at 18%? Be late on a payment and they'll jack you ass up to 32% annual interest. (That's $320 annual interest on every $1000 owed, for the math-impaired.)

Over the past decade those offering fast, easy and expensive credit have proliferated faster than Indian Casinos. Everyday they crowd our mail and email inboxes with pre-approved lines of credit in the thousands of dollars.

As a result Americans now owe these plastic peddling John Gottis an average of $8000 per household. Meanwhile the American savings rate has dropped to minus 1%. Which means a shocking percentage of Americans no longer even live paycheck to paycheck. They have to borrow before that next paycheck.

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Then there are the mortgage lenders from hell. Thanks to the Capitol Ones of the world, all those cash-strapped Americans were still able to load up on wide-screen TVs, all kinds of furniture, leaf blowers and surround sounds systems, they now also "deserved" their own home to put them in.

But first lending standards that had, since the end of WW II, had made America the homeowners capitol of the world, had to be chucked. Lenders didn't want the herd culled down to just traditionally "qualified borrowers." No siree, they wanted to lend to all comers.

When we bought our first home back in 1971 no bank would loan one cent more than 80% of the appraised value of the home. That required the buyer to have a 20% interest in the property the day the loan closed. Why? Duh!

But such rules limited the pool of borrowers that could qualify for a loan. So the lending industry sent healthy doses of dough to Washington and got the rules loosened, then loosened again, then again. After all, the Republicans were in charge now, and they believed "government was the problem." And, next to the taxman, federal banking regulations and the regulators that enforced them, were the biggest drag on the economy of all -- or say they said.

The first offspring of those efforts were so-called "low-doc" loans. The industry had argued that all the paperwork required before the advent of computers was clogging up their automated systems and slowing loan fundings. So the low documentation loan was born. Borrowers were required to provide fewer and fewer documents supporting their contention that they could actually afford, and are likely to repay, a loan.

Once the housing bubble began to really puff up, lenders even bristled under the minimalist restrictions of low-doc loans. They whined about it and, once again, Bushite banking appointees shrugged and said, "what the hell."

And so were born "No-doc" loans... referred to in the lending industry itself as "liar loans," because a borrower could claim anything and not have to prove it. It was the lending industry's version of "don't ask, don't tell."

The rush was on. Home sales boomed. Online applications allowed borrowers to refinance their homes on a whim, while drunk or on the toilet. Lenders hauled in lending fees by the billions.

But another limiting obstacle loomed. Once they lent to finance a home purchase, lenders could no longer actively milk that borrower. That's when lenders decided that the old "home improvement" loan needed some modernizing as well. In the "stupid old days" lenders required that borrowers use home improvement loan money on -- are you sitting down? -- home improvements. That way if the borrower defaulted the lender would have security for their loan in the form of capital improvements.

That limitation had become a roadblock, keeping lenders from tapping into the rising value of homes already owner occupied. So the home improvement loan was killed off and replaced by the "home equity loan." That put lenders were in the ATM business, encouraging homeowners to tap what equity appeared in their home to purchase whatever they felt entitled to; cars, boats, more TVs, vacations... spare the lender the details. The lender didn't care.

So the old-fashioned American dream morphed before our eyes into a frenzied binge of lend & spend, lend & spend, lend and spend. What our parents would have called a "spend-thrift" lifestyle, Republicans pointed to as proof "the American economy is on a roll."

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Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a Pulitzer.

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