Kathleen Engel started to notice something funny happening with home loans in 1999. She lived in Shaker Heights, Ohio, just a few blocks from the city of Cleveland. Out of nowhere, she’d found herself inundated with offers from loan brokers. They called on the phone, left flyers on her porch, sent her direct mail.
All the brokers were offering home equity loans. Engel’s neighbors were flooded with the same offers. When Engel called about the loans, she discovered a pattern: many loans offered low introductory interest rates that skyrocketed after just a few months; others contained costly balloon payments.
These loans were designed to fail, Engel realized. Within months, people on her block started losing their homes.
“I started asking, ‘Why are people making these loans?’ It didn’t make sense,” she says. “They were unsustainable from the get-go.”
Engel was a law professor at Cleveland State University. She became one of the first academics in the country to recognize the problem of subprime loans, the monster now known to be responsible for much of the 2007 recession, the largest economic downturn since the Great Depression.
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Now Engel has teamed up with Patricia A. McCoy, a professor at the University of Connecticut law school and an expert on banking and retirement, to write a new book called “The Subprime Virus.” It documents how Wall Street financial firms caused the subprime mortgage bubble, and the recession that followed, by allowing their short-term desire for profits and bonuses overwhelm concerns about the long term health of their own institutions, Engel found. They did it by controlling all aspects of the market, from individual loan officers all the way up to the investors in complicated securities swaps, and convincing Congress and federal regulators to look the other way.
“The investment banks like to portray themselves as just innocent middlemen,” says Engel, who is now a law professor at Suffolk University in Boston. “That’s just not true. They made the market. They were in control.”
Image: Justus Hayes, via Flickr.com