The Subprime Virus

On March 16, 2011, Kathleen Engel, Associate Dean for Intellectual Life and Professor of Law at Suffolk University Law School, presented  from her book The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps, co-authored with Patricia McCoy, the Assistant Director for Mortgage and Home Equity Markets at the Consumer Financial Protection Bureau (CFPB). The Subprime Virus tells the story of how abuses in the subprime home mortgage market led to the near collapse of the world’s financial system. 

In her presentation, Professor Engle briefly described the evolution of subprime lending from fringe financial services to mainstream services, and how the evolution was accompanied by a series of government lapses where federal regulators had the power to stop predatory lending, but chose not to do anything. As a result, the economic distress caused by subprime lending in seemingly isolated communities such as  Cleveland, OH eventually spread around the world like a virus, leading to a world-wide financial crisis and the Great Recession. In response to government and market failures, The Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year. Professor Engle remarked that the financial reforms are a silver lining in the subprime lending story, as they aim to simplify mortgage products, improve disclosure to consumers, change financial firm incentives away from offering harmful products and regulate problematic practices like credit default swaps. However, she says the financial reforms are not the full solution. Professor Engle concluded with a list of outstanding questions including the critical query about the government’s role in housing finance to the allocation of interest rate risk. 

Raphael Bostic, Assistant Secretary for Policy Development and Research at the Department of Housing and Urban Development, delivered comments on Professor Engle’s presentation.  He provided perspective on why government failed to respond before the subprime problems reached a crisis stage and how US housing policy is rolling back its focus on homeownership. He concurred with Professor Engle that the Dodd-Frank reforms are an important first step, and added that the reforms are causing federal policy makers to re-consider how to create housing policy that uses housing as a platform for stability.

Participants

Featured Speakers
Kathleen Engel
Co-Author, The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps
Associate Dean for Intellectual Life and Professor of Law, Suffolk University Law School

Raphael Bostic
Assistant Secretary for Policy Development and Research
Department of Housing and Urban Development

Moderator
Reid Cramer
Director, Asset Building Program
New America Foundation