Student loans have now become the MBS of the 2008 financial collapse
If there is one single truth on Wall Street today it is that if bankers can get access to it, it will become financialized.
Many who have read the book or watched the movie, The Big Short, know that the Mortgage Backed Security have been around as far back as the 1970’s, and played a significant role in helping create economic growth over the next two decades. ¬†But following three small and large financial recessions and crises, the housing boom slowed down considerably in the late 90’s until around 2004 when the relatively stable MBS program morphed into a monstrosity that fundamentally led to the 2008 financial collapse.
Fast forward to 2010 when President Barack Obama nationalized Sallie Mae and the student loan program.
To help mask the fact that real economic growth and higher paying jobs were not going to return to the U.S. economy in the aftermath of the Great Recession, the Obama administration began a serious push to get both young and old alike into college and help delay their going into the workforce. ¬†And to accommodate this, the government began backstopping nearly 100% of all student loans which drove up prices at most Universities, and indebted an entire generation.
But as noted from above, Wall Street never let’s an opportunity go to waste. ¬†And as such they saw the over $1 trillion in student loans as a means to create new financial products which they could bundle up just like they did with housing a decade before, and sell them to willing buyers under the auspices that the debtors couldn’t default on them because by law they aren’t dispensable through bankruptcy.
One rarely discussed feature of the “student loan industrial complex” is the¬†$200 billion¬†market for student loan asset-backed securities (SLABS). This is a¬†circular business, involving lenders like Sallie Mae and big banks like Wells Fargo and Bank of America. Like mortgages, student loans get pooled and repackaged into new financial products (securities). The lenders then sell the securities to investors. Investors receive the reward of monthly loan payments, plus interest. They can hold the securities themselves, trade them or¬†bet on them. In turn, lenders receive quick cash, including fees and commissions, and push the risk of the underlying loans onto investors. This shift allows lenders to make more, and larger, loans.
Absent the most extreme circumstances, borrowers can’t¬†declare bankruptcyand have their student loans forgiven like other debts. The threshold for relief is so high, and lawyers are so expensive, that fewer than 1,000 borrowers even¬†try each year. For most loans, if borrowers don’t pay on time, the government can dip into wages, unemployment benefits, tax refunds and even Social Security checks. Unlike mortgage borrowers, who can hand over their keys and walk away, student debtors can’t return their diplomas. Overall, these constraints for borrowers make SLABS uniquely safe investments. As one corporate attorney¬†explained¬†in the¬†Wall Street Journal¬†last year, SLABS are attractive primarily because of harsh bankruptcy legislation. –¬†Rolling Stone
Ironically in all of this however is the fact that like the former MBS/CDO/CLO debacle, where the deeds and notes were separated and stored in a database known as MERS, much of the documentation tied to these student loans that have been securitized are either lost, incorrect, or has been mishandled, and that is opening the door for many individuals who owe this debt to actually have an avenue in which it can be erased from their ledgers.
National Collegiate Funding (NCF) is an umbrella name for 15 trusts that collectively hold 800,000 private student loans, totaling some $12 billion in outstanding obligations.¬†¬†The only problem is that roughly $5 billion worth of those loans, or over 40%, are currently in default¬†(and you thought auto delinquencies were bad).
Now, ordinarily when a student defaults on their loan, NCF simply files a lawsuit in local or state court as a means for negotiating a settlement or payment plan with the borrower.¬† Often times, NCF wins these cases automatically as the borrowers don’t even bother to show up for their court date.¬† In cases like that, NCF can use their court victory to garnish wages and/or federal benefits from entitlement programs like Social Security which can haunt borrowers for decades (we actually wrote about it here:¬†¬†Baby Boomers Increasingly Having Social Security Checks Garnished To Cover Student Loan Payments).
That said, NCF is increasingly finding that, much like the subprime mortgage debacle from 10 years ago,¬†student lending institutions apparently had a really hard time keeping tracking of paperwork over the years and/or processed deeply flawed contracts with incomplete ownership records and mass-produced documentation¬†(who can forget that whole robo-signing catastrophe).¬† –¬†Zerohedge
The bottom line is that if you owe student loan debt from the past seven years, there is a chance that Wall Street’s greed could become your salvation. ¬†And it is vital to check with a good lawyer on the status of your loans should you come to the point of being honestly unable to pay on them, as chances are perhaps as high as one in five that it could be expunged due to the incompetence of the loan originators or Wall Street brokers.
Kenneth Schortgen Jr¬†is¬†a writer for¬†The Daily Economist,¬†Secretsofthefed.com,¬†Roguemoney.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.