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Student loan default process looking eerily like 2008 housing foreclosures as DOE orders halt to collections

Student loan default process looking eerily like 2008 housing foreclosures as DOE orders halt to collections

When the housing bubble burst in 2007-08, the courts were inundated with hundreds of thousands if not millions of mortgage defaults that were immensely convoluted due to the fact that wall street fraud had made determination of ownership nearly impossible.  And the heart of this was the process where mortgage lenders had sold their mortgages to investment banks who then split the deed from the title, and then packaged those deeds into mortgage backed securities while segregating the titles into a massive database known as MERS.

Additionally, judges and administrators within the courts themselves were so incompetent in the understanding of the details of the fraud created by Wall Street that they simply accepted the arguments of the big banks without merit during foreclosure procedures, and allowed the breaking of contract law to go through to the detriment of homeowners despite the revelations that these banks had committed a secondary crime when they ‘robo-signed’ new titles when they didn’t have the original ones.

Fast forward to 2017 where the housing bubble has now been replaced by the student loan bubble, and the growing number of defaults are now overwhelming the Department of Education who became the arbiter of these loans when former President Barack Obama nationalized Sallie Mae during his term in office.

The system used by the Dept. of Education to collect on defaulted student loans came to a standstill in the last month, leaving an estimated 91,000 accounts in limbo, when the agency ordered debt collectors under contract to stop making collections on accounts.

As Consumerist’s Ashlee Kieler reports, consumers who expected their student loan payments to be deducted from their bank accounts this month have reportedly found the funds untouched, and their calls to the companies unanswered thanks to a Department of Education’s order prohibiting the debt collection companies from working on default accounts in response to two lawsuits against the agency.

The strange turn of events began with a lawsuit filed by two debt collection companies, who claim they were unfairly were fired by the Obama-era Education Department for poor performance. On March 29, the judge issued a temporary restraining order that prevented any new defaulted borrowers from being assigned to debt collectors and put into rehabilitation programs. Instead, the borrowers have piled up inside the department’s system, waiting.

On April 21, the government ordered the debt collectors involved in the suit to stop work altogether on defaulted accounts: no phone calls, no withdrawals from student accounts, nothing.

More recently, the Dept. of Education ordered servicers to stop work on defaulted accounts. The actions, the companies argued in court filings [PDF], “fundamentally alter the status quo and are not fiscally responsible to the borrowers or to the federal taxpayers.”

“Thus, the well-documented student loan crisis will become a pandemic not because this Court ordered that result, but because [Dept. of Education] thinks that is what this Court expects,” the companies argue. – Zerohedge

With student loan debt now estimated to be around $1.44 trillion, the number of eventual defaults will only continue to grow leaving debtors in a state of limbo since these loans are exempt from bankruptcy protections, and the so-called ‘economic recovery’ has been insufficient in creating higher paying jobs which would allow graduates to feasibly be able to pay down their loans.

Whenever the government intervenes or interferes with both contract law, and the natural mechanisms of the free market the results are almost always a fiasco since lawmakers are inept in understanding the consequences of opening up specific markets to those who cannot afford to participate in them to begin with.  And whether it is manipulating interest rates and backstopping loans to those who really can’t afford home ownership, to funding student loans to those who really shouldn’t even be going to college, and even in getting involved in healthcare where their actions have caused prices and premiums to skyrocket in just the five years since Obamacare went active, the bottom line is that every time the government gets involved in a consumer industry, the end result is the building up of an unsustainable bubble, and the further weakening of the American consumer when that bubble bursts and the people are no longer able to pay off those debts.

Kenneth Schortgen Jr is a writer for The Daily Economist, Secretsofthefed.comRoguemoney.net, and Viral Liberty, and hosts the popular youtube podcast on Mondays, Wednesdays and Fridays. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.


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