The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps

The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps

The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps

The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps


The subprime crisis shook the American economy to its core. How did it happen? Where was the government? Did anyone see the crisis coming? Will the new financial reforms avoid a repeat performance?

In this lively new book, Kathleen C. Engel and Patricia A. McCoy answer these questions as they tell the story behind the subprime crisis. The authors, experts in the law and the economics of financial regulation and consumer lending, offer a sharply reasoned, but accessible account of the actions that produced the greatest economic collapse since the Great Depression. The Subprime Virus reveals how consumer abuses in a once obscure corner of the home mortgage market led to the near meltdown of the world's financial system. The authors also delve into the roles of federal banking and securities regulators, who knew of lenders' hazardous mortgages and of Wall Street's addiction to high stakes financing, but did nothing until the crisis erupted. This is the first book to offer a comprehensive description of the government's failure to act and to analyze the financial reform legislation of 2010.

Blending expert analysis, vivid examples, and clear prose, Engel and McCoy offer an informed portrait of the political and financial failures that led to the crisis. Equally important, they show how we can draw lessons from the crisis to inform the building of a new, more stable, prosperous, and just financial order.


Abusive subprime lending burst into public consciousness in 2007, but its legacy dated back years. As early as the 1990s, consumer advocates were reporting predatory lending in lower-income neighborhoods. This early period was the first iteration of subprime lending. Only later did subprime loans morph into products that ultimately brought down the financial system.


To trace the emergence of subprime lending, we have to begin with the home mortgage market in the 1970s. Back then, mortgage lending was the sleepy province of community thrifts and banks. Banks took deposits and plowed them into fixed-rate loans requiring down payments of 20 percent. Consumers wanting mortgage loans went to their local bank, where loan officers helped them fill out paper applications. The applications then went to the bank’s back office for underwriting. Using pencils and adding machines, underwriters calculated loan-to-value and debt-to-income ratios to determine whether the applicants could afford the loans. In addition, underwriters drew on their knowledge of the community to assess whether the customers were “good folk” who would repay their loans.

Banks kept their loans in their portfolios and absorbed the loss if borrowers defaulted. Knowing that they bore the risk if loans went bad, lenders made conservative lending decisions. They shied away from applicants with gaps in employment, late payments on bills, and anything less than solid reputations in the community. People of modest means could rarely obtain loans because their incomes were too low and they couldn’t afford the high down payments. For people of color, obtaining credit was even harder. Many lenders refused to serve African-American and Hispanic borrowers at all, even when they had high incomes and flawless credit histories.

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