Law professor one of nation's leading experts on subprime lending

When Patricia McCoy was a law professor in Cleveland, Ohio in the 1990s, each day she drove through a neighborhood called Hough that was changing before her eyes. Once stricken by poverty and riots and long-sullied by empty storefronts and ramshackle homes, it began undergoing a transformation, thanks to new public and private investment in the area.

Uninhabitable homes were being razed, new buildings were under construction, and businesses were opening.

“There was a real sense of pride in the neighborhood,” says McCoy, now a professor at the UConn Law School and a specialist in banking and securities regulation.

But before long, she began hearing reports that some of these new homes were already in foreclosure – only a short time after new residents bought them.

“I wondered why a lender would make a loan to somebody who was so likely to go into foreclosure,” she recalls. “I started to fear that the turnaround was fragile.”

She suspected there was a double standard when it came to lending: while the more affluent were offered legitimate loans, poorer people were being offered predatory terms many did not fully understand and could not afford.

“I saw that there was a very serious issue regarding how banking affected ordinary people, particularly those of modest means,” she says. “My Cleveland colleague, Kathleen Engel, and I were disturbed and felt we had to get to the bottom of subprime lending, beginning in late 1999 and 2000.”

While she did not predict the global enormity of its implications, she knew that sort of risky lending spelled trouble down the road.

What McCoy was seeing was the beginnings of the subprime lending crisis that would eventually lead to the collapse of the U.S. economy and world financial markets in the fall of 2008.

Campaign adviser
McCoy is now regarded as one of the nation’s leading legal experts on the subprime crisis and has been sought out for analysis by publications like The Wall Street Journal and The Economist.

She was also one of the experts advising the presidential campaign of Barack Obama, and has continued to advise the transition team on current and emerging issues and policy options to deal with them.

“We were encouraged to have a diversity of ideas and a very vigorous debate,” she says.

Roots of the problem
McCoy believes the crisis was far from unforeseeable. She says it was very clear from the data that the problems she saw in Cleveland were happening elsewhere.

At that time, however, the subprime market was relatively small. Subprime loans mushroomed between 2003 and 2007. What went from being highly risky in 2003 snowballed in the next five years to being totally unsustainable, she says.

McCoy identifies two main sources of blame: “One consists of lenders and Wall Street: Wall Street manufactured artificial demand for subprime loans because investors could make a high rate of return, and lenders slashed their underwriting standards to provide the volume of loans that Wall Street wanted.”

She says the second source of blame is the federal government.

Although Congress severely deregulated mortgages in the 1980s, federal regulators still had a lot of tools at their disposal to stop lax underwriting, she says.