When the bottom fell out of the subprime mortgage market, the real story was always the number of foreclosures that were down the pipeline. The news continued to warn that the worst was yet to come. I guess that we are trying to maintain the illusion of stability, because the powers that be are afraid to pump fear back into the market? How so, you ask?
Well, the comments on my post from last week reveal how the student loan market resembles the now infamous subprime mortgage market:
EvrenSeven (a regular BIDER reader) wrote: Does anyone know if student loan debt has been repackaged and sold off as securities like mortgages were? [DAMN good question, man]
Anonymous answered: Oh, yes, it has been. In fact, it's even better than that. By manipulating the cohort default rate, the private banks for "federal" loans (like Sallie Mae) can make it appear that a very low percentage of students actually default on their loans. So, using a two-year cohort default (which was the standard until recently when it was changed to a three-year default rate), the banks can claim that only 4 or 5% of their student debtors default. Using that data, the federal government then decides how much of each bank's portfolio they are going to guarantee. Then the banks take that guarantee, and use it to market securities based on the student loan payment streams. The then sell the securities to the market as "safe" investments because they are backed by the government to 97% of the underlying debt obligations, for example. It's the same as the rating agencies getting it horribly wrong with home mortgages, or not really caring about whether they got it right. It's just the federal government pricing the securities instead of Standard & Poor's. Of course, by excluding anyone in default for more than two years, the banks can get a low default rate, a high federal guarantee percentage, and a "safe" security to sell. Of course, there IS less risk because no one can discharge the loans in bankruptcy. But at some point, when it becomes pointless for the students to even try to pay on the debts, then trouble still comes to town.
Now, THAT'S a story!
Let's do a headcount. How many of the BIDER readers have loans that are in forbearance? Are you running out of time? Will you be able to handle the payments when you finally get a job, considering that the interest will be compounded and added to the loan? Are there more loans in forbearance than there are mortgages that are delinquent? According to this news story, "about 10 percent of the loans were more than 90 days delinquent by the end of 2009."
Am I the only one that sees the connection here?
I'm a nay sayer, I know. But the worst is yet to come. But there is a silver lining:
Under the current rules, schools with default rates of 25 percent or more for three consecutive years, or a default rate higher than 40 percent in a single year, lose their eligibility for the federal student aid that provides most of the revenues for for-profit colleges.
Congress! Please don't change that law!
Posts
http://chronicle.com/article/Many-More-Students-Are/66223/
ReplyDeleteThe NY Times is built on the same, empty prestige that leads certain people to certain occupations and certain schools. You really need to stop believing the marketing pitch.
Securitization report.
ReplyDeletehttp://www.nchelp.org/elibrary/Reports&Testimonies/IndustryReports/Student%20Loan%20Primer%209_02%20.pdf
WOW... Phenomenal links, readers!!! That's crazy shit.
ReplyDeleteStudent loan default rates have been declining since 1998, when Congress further restricted the discharge of most student loan debt in personal bankruptcy.
Sounds like a safe investment... suuuuuuuuure.
Wait, so one in four students from a particular school can have their futures utterly destroyed, and as long as the school doesn't string together three years in a row, it's acceptable to society?
ReplyDeleteNo. Congress needs to change the law. The percentage should be much, much lower than 25%.
Great entry, Angel. It shows you how messed up the system is, that the default rate is this high with all of the safeguards in place, i.e. federally-backed loans, deferments, hardships, extended deferments, etc. If most of these loans were not federally-backed, the default rate would be MUCH higher.
ReplyDeleteTrying to stem the flood will accomplush no more than pushing back the day of reckoning. Imagine that the Mississippi River severely flooded, and the neighboring communities built a few levees. Even with help from the Army Corps of Engineers, national guardsmen, volunteers, Red Cross, and others, if the flood was powerful enough, the dams would be busted or compromised at some point. All these efforts help to mitigate the damage, but they will not completely prevent some areas from disaster.
This is the mechanism of funding for boomer's retirements and retirement cruises.
ReplyDeleteWell, yes, and is it any surprise then why the Bush administration and the 2005 Congress decided to make private student loans non-dischargeable in bankruptcy? They're not quite the same kind of "safe" as federally-guaranteed (or "federal") loans, but stringing the kids up for a guaranteed life-long payment obligation (no matter the circumstances) is as close to a guarantee that the banks could get on LOANS THAT WERE ALREADY ISSUED, and so, it was that private loans became just another iteration of the sub-prime debt bubble. Like home mortgages, you made money on securitization as long as you could dig up more and more mortgagors, and, eventually, in order to get more of a dwindling supply of suckers, banks had to get mortgages from people who were worse and worser . . . credit risks. It was never, obviously, about these people's ability to pay on the underlying obligations. Just like home values that had never dropped, student debt was always good debt; it was always an obligation that paid off in the end, and, of course, the whole game was about getting the raw materials to construct socially-useless financial instruments that brought in cash. In the same way, the banks (through Congress) found a way to get a kind of "guarantee" on the more risky private loans, not because of any legitimate policy reason or fear of strategic default, but because that was the only way the more risky contracts could be called "safe" in the market and the only way the risk of the real-money making activity (i.e., securitization) could be white-washed. The change in the bankruptcy legislation in 2005 was just another lowering of the bar that allowed more securities could be called "safe" or "AAA", allowed the banks, therefore, to sell more of them, and allowed them to make more money. It's nothing new, really. And this idea that the student loan bubble is different from the mortgage bubble because student loans can't be discharged in bankruptcy, is not really a countervailing argument. There may be other reasons why there are differences, but, to my mind, the student loan bubble is even more corrosive because the corrosion will not simply be financial with a side of bankruptcy. That would be wonderful for so many of us. This bubble doesn't just bring people back down to zero. This bubble condemns people. It's as socially-corrosive as it is financial-destructive.
ReplyDeleteIf you're expecting the news media to get it, though, you're going to be waiting a long time.
@ Angel: "Student loan default rates have been declining since 1998, when Congress further restricted the discharge of most student loan debt in personal bankruptcy. . . . Sounds like a safe investment... suuuuuuuuure."
ReplyDeleteYes, see, that's the rub. It is a safe investment. Just not for the students. And, with the news media, you've got the students policing the professors. Don't you think that, if they could, most of the "journalists" would be banking if they could?
You'd better keep paying up on your Access Group loans, people. We have extraordinary powers of collection at our disposal if you don't.
ReplyDeleteWait. Come to think of it, don't pay your loans and default, because we also run the collection agency that will come after you (more profits for us). We can also tag on fee upon fee, and up the interest rate to 22% on your private loans, further compounding your misery.
No bankruptcy discharge. No escape. You're trapped, like you're in a roach motel or a crab trap.
MUHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!!!!!!!
This issue needs to be a sustained focus here or over at Down by Law.
ReplyDeleteWell, if you think about it- student loan backed securities are probably the safest investment out there, assuming that pictorial representation that went around last week or so is correct. Student loan holders can attach personal property; and the personal and real property of the cosigners (so parents can lose their homes) but they can also attach social security and 401K accounts of the cosigners, and it's a pretty save bet that in the aggregate, the purchasers of the securities will come out ahead. If I had any money to invest, I'd be balls deep in this. If you can't beat 'em (and you can't beat'em) join'em.
ReplyDeleteThey can attach 401ks? Can someone link to that? TIA.
ReplyDeleteMine was in forbearance for a year then they kicked me off of it. Luckily, I was temping at the time and now work full time so I keep paying.
ReplyDelete@2:07 - you forgot to mention that most student loan ABS carries with it the explicit guaranty of the United States government, and even private student loans have guarantees of shell companies and some include bond insurance.
ReplyDelete@EvrenSeven:
ReplyDeleteOh, I don't know if I agree. You may have a better understanding than I. That's entirely possible, but to my mind, I'm not so sure that there are that many cosignors out there or that recent graduates have that much in assets. To my mind, anyway, a lot of student lending - even with the non-dischargeability in bankruptcy - is unsecured, and the lenders don't really have much recourse if you really, absolutely cannot pay except in blood. They seem to shout, "Boo! We're going to tank your credit score." But, that seems like that's all they can really do. And at some point, the outstanding principal, interest and collection costs will amount to such a huge figure that it will not make sense even to try to pay. Then you're stuck with a wage garnishment, but I can't think that that is such a great thing for the banks. They're not going to get what they need out of a wage garnishment and pool of debtors not really motivated to make much money or to ever pay off their student loans.
I think it's important to keep in mind also that, again, to my mind, when we're talking about securitization or asset-backed securities, we're talking not about the students' payment obligations, but about a secondary or tertiary instrument whose value is almost fictitious in the sense that it is pegged to the performance of the loans. So, even if a bank is making money on wage garnishments, if an investor has made promises simply on how a pool of loans will perform, and then the pool falls well short of expectations, they can lose a lot of money on that. Anon. @ 2;09 PM is right that ABS on so-called "federal" loans carry the guarantee from the government, and in that case, the fraud on the part of the banks about the default rate is the main issue. But, with so-called private loans, the government doesn't give a guarantee; and, with private loans, yes, there are private guaranty companies, but so were there insurers like AIG in the U.S. mortgage mess. Ultimately, unless you've got the government on the guarantee, someone in the private sector is going to bear the burden of default.
A debt based monetary system is madness and was always condemned as usury and one of the surest paths to damnation for those who advocated it. We have got to put an end to a debt based monetary system and fractional reserve banking.
ReplyDeletewww.themoneymasters.com
Once the bond investors get spooked, it's all over.
ReplyDeleteI love how Universities can finance buildings with bonds. And enjoy tax exemptions. And not have to worry about capitalization.
Whenever I think of how our elders looked out for us, I think of this:
http://upload.wikimedia.org/wikipedia/commons/7/77/Saturno_devorando_a_sus_hijos.jpg
haahahah! That sums it up. I have much resentment for my own parents who are boomers. My mother told my friend's mother that she is stupid for having bank accounts for her grandchildren... after all, they will get it all when we die, she says. Well, they aren't going anywhere and we're dying now!!!! Ugh. Maybe I need a therapist. Lots of deep seated resentment.
ReplyDeleteAnother NY Times article provides the repayment rates:
ReplyDelete"Although the department issued no analysis or comparison of repayment rates by sector, outside advocacy groups that analyzed the data found that in 2009, repayment rates were 54 percent at public colleges and universities, 56 percent at private nonprofit institutions, and 36 percent at for-profit colleges."
http://www.nytimes.com/2010/08/14/education/14college.html?fta=y
If you want to see the repayment rates of a particular school, the data is accessible at
http://go.philly.com/repay1
or
http://www.philly.com/philly/business/personal_finance/20100912_Personal_Finance__Getting_an_education_that_pays_the_loans.html
How is the fed going to deal with ~10 thousand below median tier 3/4 grads being pumped out each year with federally backed loans they can't possibly repay?
ReplyDeleteYou'd think that part of the stipulation for backing these loans would be a reasonable belief that there are actually enough positions out there requiring a JD and bar passage. I mean, this is just sick.
And I've got nothing against the third and fourth tier. I don't think that getting a low GPA and a low LSAT makes you incompetent or stupid. Nobody thinks doctors graduating from the "worst" med schools are stupid. Nobody thinks a student who couldn't get into med school is stupid.
These kids just ain't getting jobs. Employers understandably have limited resources to consider people. They can't afford to let every law student tag along with them over a summer, it's just too much. Unfortunately they have to use criteria that sometimes get it right (your GPA is low b/c you partied and didn't try) and sometimes not (forced below median by the curve even though you do generally good work).
This is not sustainable. I smell a bailout coming, and it's going to come out of everyone's paycheck (just like the last one did).