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The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps [Kindle Edition]

Kathleen C. Engel , Patricia A. McCoy

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A valuable one-stop resource... In the recent glut of titles on the subprime-mortgage crisis, this book fills the gap between watered-down pop accounts and esoteric economic analyses. Library Journal


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.


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Die hilfreichsten Kundenrezensionen auf (beta) 4.6 von 5 Sternen  8 Rezensionen
8 von 8 Kunden fanden die folgende Rezension hilfreich
5.0 von 5 Sternen One Hell of a Whodunit and Why (Money, of course) 16. Februar 2011
Von FiscalConservative-SocialLiberal - Veröffentlicht auf
Format:Gebundene Ausgabe|Verifizierter Kauf
I'm only one third of the way through the book, but this eminently readable and comprehensive compilation of errors and events that got the US (and the world) into this serious financial meltdown is impressive. The accounts of the Bush and Obama administrations' efforts to quell the collapse is fascinating. You feel that you are living the history, standing at the edge of the abyss. Hardly a book that I expect from two distinguished law professors! It's readable, highly informative and fascinating.

This book is neither an economic tome nor a populist screed. Any reasonably open-minded citizen will gain perspective, insight and a balanced understanding of what went wrong and why.

If the "what to do about it" portion of the book is similarly powerful, it should already be a classic.
4 von 4 Kunden fanden die folgende Rezension hilfreich
5.0 von 5 Sternen Should be required reading for political science and econ majors 16. Juli 2011
Von R. Alembik - Veröffentlicht auf
Format:Gebundene Ausgabe|Verifizierter Kauf
This is an engaging and informative work that manages to be sophisticated, but not pedantic. It would make a good 200- or 300-level college political science or econ text. Anyone who would debate the good or bad side of government regulation should be required to read and address the arguments and observations made in this book before engaging in any sort of debate. I was a political science major in college and am now an attorney. I've always had difficulty grasping how financial institutions are regulated... despite efforts to learn on my own. This book finally clarified what some might argue is the unclarifiable: our financial regulatory scheme. The "plot" development in the context of the meltdown reads like any good fiction. What's tragic is that it's NOT fiction. In fact, it looks more like history that's about to repeat itself... again.
1 von 1 Kunden fanden die folgende Rezension hilfreich
2.0 von 5 Sternen Dated, with little original research or analysis 12. Februar 2014
Von MT57 - Veröffentlicht auf
Format:Gebundene Ausgabe|Verifizierter Kauf
I am working my way through all the books about the 2007-09 financial crisis. This one is a little unusual in that it is neither a journalistic account nor an analysis by economists. It is written by two law professors and in some ways reads like a legal brief, that musters facts from the public record (as opposed to original reporting or research) to support an argument (here, the well-worn "greedy industry, lazy regulators" line), with no effort to present or weigh competing explanations.

The first part of the book is a recitation of bad events in the history of subprime lending which the authors appear to have spent some time advocating against. It is a good source for incidents of that type if one is researching them. They catalog a large number of anecdotes. Oddly, though, they ignore certain major subprime lenders like American Home Mortgage and touch much more lightly than others have on Ameriquest (which was the subject of another book I have reviewed on Amazon, "Monster"). I could not figure out what the authors' basis was for selecting and excluding anecdotes and companies.

The second part of the book is a choppy recitation of the financial events of 2007-08. As those have been written up many times before, I thought again that this was an odd thing to spend so much of the book on. Who among the buyers of this book did not know this chronology already?

The third section of the book describes the competition among bank and lending regulators during the 90's and 00's. The part relative to mortgage oversight was fairly well done, although a little overstated. The paragraph where they lay the collapse of multiple large lenders at the feet of one bank supervisor was absurd, given the large structural forces in the economy driving over-extension of credit to poor credit risks. But I appreciated learning that the regulators' budgets were driven by the size and success of the lenders they oversaw, which created a perverse incentive for the regulators to help them grow, rather than keep them in check. That said, this section could easily have been folded into the first two as there was way too much repetition in it.

Further, the portion of the regulatory section that addresses "Wall Street" regulation was riddled with errors. For instance, there was no run on bank deposits at Wachovia Bank N.A. as they write; the liquidity issue that group faced was the commercial paper of the holding company, Wachovia Corp. To a lay reader this may seem like a quibble, but the authors claim in this chapter to be explaining the regulatory maze to the reader and claim that the difference between a bank and its holding company was significant, so this is clearly an error in what they claim to be their area of expertise and focus. Similarly, their discussion of Basel II and of the dynamic that led to the SEC alternative net capital rule is woefully inaccurate and incomplete. They create a misleading impression that low net capital requirements were offered by the SEC to help US investment banks escape "heavy" European regulation, which is ludicrous, because European banks subject to the supposedly "heavy" regulation were - and remain - much less capitalized in fact than US counterparts. The capital adequacy standards applied to the US investment banks by the SEC came straight out of Basel II, not a bargaining process with the "Big Five". As well, the authors inexplicably choose not to discuss the incentives in Basel II and the US political system to perpetually increase mortgage lending, a point brought out very well in Engineering the Financial Crisis, another book I have reviewed on Amazon. There were several other errors in this section but I will spare the reader the entire list. I suspect that the authors' prior background is much more on the consumer end of the subprime mortgage virus and not on the financial intermediary side, as this section was not well done.

I was finally disappointed to see that the authors made no effort to quantify the impact of subprime lending on the financial condition of the entities that failed. At the outset of the book, they gave the impression they would be showing how the one caused the other which would have been interesting, as I haven't seen it done before (not that I doubt it much, but it would have made the book more impressive.

The last section of the book is an exploration of reforms, much of which is devoted to arguing for Dodd-Frank, which is why I find the book rather dated. I am not sure how I would have graded it in 2011, but at this point, it is not a book I would recommend to anyone.
10 von 14 Kunden fanden die folgende Rezension hilfreich
5.0 von 5 Sternen Very good treatment of a complex topic 18. Januar 2011
Von Rob - Veröffentlicht auf
Format:Gebundene Ausgabe
The authors have done an excellent job of covering every aspect of the crisis. Oddly, another reviewer mentions their neglect of the CRA. As the CRA was only an American law, it doesn't seem relevant to a problem that broke out in a great many countries simultaneously for roughly the same reasons. And he had the audacity to accuse these authors of trying to shift the blame! Just another bit of right-wing delusion. It's surprising how many nutjob apologists have sprung up to defend the predatory lending practices that their libertarian philosophy has engendered. In any case, the authors of this book understand the crisis and do an excellent job of describing how it unfolded, their clear explanation rising well above the noise generated by Beck and his mindless followers.
2 von 3 Kunden fanden die folgende Rezension hilfreich
5.0 von 5 Sternen Excellent - 31. Juli 2011
Von Loyd E. Eskildson - Veröffentlicht auf
Format:Gebundene Ausgabe
I've read a number of background books on 'The Great Recession' - 'The Subprime Virus' is one of the best because it both gives provides very readable, credible/documented background and specifics on how the front-line frauds, regulatory lapses, and reckless credit helped create the collapse.

Subprime - Evolving From Fringe to Mainstream Service: Congress passed a law eliminating interest-rate caps on first-lien home mortgages in 1980 and in 1982 permitted products other than fixed rate, fully-amortizing loans. Computerized automatic underwriting reduced costs an average $916/loan, but many assumed housing prices would go up indefinitely and none had a human's 'sixth-sense' of when something didn't add up. Even more important, per the authors, was the securitization of home mortgages. The roots of this practice dated back to the 1930s when Fannie Mae was established to increase money available for home mortgages - it initially purchased FHA-insured mortgaes, and was exempted from taxes in exchange for meeting HUD-set affordable housing goals. Private lender then decided to do likewise for subprime loans - then ignored by Fannie Mae. Both private securitizers and Fannie Mae relieved banks of the problem of financing long-term mortgages with short-term demand deposits - a cause of the 1980s S&L loan crisis. They unfortunately also relieved mortgage originators of responsibility for the quality of the mortgages they originated, and allowed thinly capitalized entrepreneurs to become unregulated nonbank mortgages lenders.

Meanwhile, low Federal Reserve interest rates came to dominate the early 2000s, growing out of efforts to compensate for the LTCM crisis, dot-com bubble collapse, and the 9/11 market collapse. This formed the foundation for the housing boom that Greenspan hoped would take up the slack. HELOCs and patriotic calls for spending also helped boost the economy, and household debt grew from $7.2 trillion in 2001 to $13.6 trillion in 2007. At the same time, the government had little interest regulation (focus was on watering down regulations to make life easier for banks), holding that the market was self-regulating and being more interested in increasing home-ownership. (The latter began in the Clinton administration.) Subprime loans rose from 12% of mortgages in 2000 to 36% in 2006.

Citigroup was an early player in the subprime market, having bought Baltimore-located subprime lender Commercial Credit and renaming it CitiFinancial (CitiFi). Existing homeowners were the most frequent targets for subprime loans - they had equity, were easy to identify through property records. Those with housing code violations, recent older widows, minority neighborhoods, and those taking out/having problems paying consumer loans were especially targeted. High rates and fees ruled, and shady contractors who helped homeowners finance repairs became rife. Balloon payments helped generate the need for 'repeat' (refinance) business and additional fees.

The most toxic 'alternative-mortgage' that evolved was the 'pay-option' ARM allowing borrowers to select, each month, from 1)paying full principal and interest, 2)paying only the interest, or 3)paying a set amount less than the interest alone. (The latter option increased the principal balance up to a set limit - usually 120% of the original balance. Seventy percent of those electing this option ended up having their mortgage 'recast' at higher payments. Countrywide Mortgage alone sold about $750 billion worth of these between 2004-2007. Meanwhile, between 2001-2006, the average LTV among subprime borrowers increased from 79.4% to 85.9%; piggyback loans with combined LTVs of 100% represented almost 40% of subprime loans by 2006. Owners of securitized first-mortgages often didn't know there was a 'silent second.' Standards were steadily lowered through 'stated income' (no-doc), NINJA loans. One study found almost 60% of stated income overstated incomes by at least 50% vs. the amount reported to the IRS.

Fees on a $300,000 state-income loan were as high as $15,000, vs. $5,000 fixed-rate full-documentation loan. By 1/2009, the outstanding subprime mortgage debt neared $2 trillion. To entice brokers to throw loans their way lenders slashed approval times and documentation requirements, and overlooked reports of wrong-doing. The FBI in L.A. found a forger creating false W-2s, pay stubs, etc. for over 100 mortgage brokers. Some lenders outsourced loan underwriting for as little as $10/application. Subprime loans originated in 2004 had a 3-year default rate of 5%, 8% for those originated in 2005, and 16% or those in 2006. States generally lacked requirements that brokers be capitalized or bonded, effectively making many of them judgment-proof.

Due-diligence firms were paid to review a sampling of loans being securitized - it was not uncommon for 75% of those initially rejected to be subsequently approved by supervisors. Investment banks etc. had the right to return loans defaulting early, etc. - but usually there was a cap on the percentage that could be returned - eg. 2.5% for New Century. Securitization fees were usually at least 1% - $20 billion between 2000 and 2007.

Rating agencies usually were paid by potential bond investors, avoiding conflict of interest. However, in the mortgage market the SEC allowed payment by arrangers and the fee rates were 4-5X that for municipal bonds. CDOs-squared and cubed made 'sirloin out of chicken.' They were also undiversified - both in type of content and geography. Banks offloaded CDO mortgages they held from their balance sheets via structured investment vehicles (SIVs), financed by short-term paper. Credit Default Swaps (CDS) were insurance policies on CDOs, often not even owned by the CDS buyer; AIG was a major player ($500 billion), though it stopped writing such insurance in 2005. Countrywide misled investors by characterizing buyers with FICO scores of at least 500 as prime, vs. the industry standard of 620. Previously the subprime market in manufactured home mortgages and auto loans had collapsed -similar to what happened in the subprime home mortgage market.

After the subprime market collapsed, new scams emerged - foreclosure rescue scams (pay up front, receive nothing or phony documents), con artists rented out foreclosed homes, owners of 'walkaway properties' suspended foreclosure actions to avoid liability for code violations.

In 2004 the SEC exempted the five big Wall Street investment banks from the 15:1 leverage limit. Bear Stearns and Morgan Stanley then went to 35:1, Lehman hit 31.7, Merrill Lynch 31.9, and Gold 28. The biggest commercial banks averaged 11:1. Commercial banks spent over $50 million on lobbying in 2009. During the Bush administration, regulatory staffs were cut and rule enforcement generally weakened. After the crash, banks (eg. Wells Farco, Citibank, BofA, etc.) then became involved in fraudulent repossessions - sponsoring the creation of false documents to fill the void caused by unlocatable paperwork. Meanwhile, the government helped the banks by changing rules to cover up their weak assets, and taking over Freddie Mac and Fannie Mae.
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