Financial topics

[Reality Check]

I just want to mention something I saw the other week. Bernake was testifying that the current economic malaise can't be nearly as bad as that of the 1930s because we have "safety nets" like unemployment compensation and food stamps. Reminded me of his earlier statements that "subprime is contained". As far as being right part of the time, "subprime (wa)s contained" for a while and we still have "safety nets", for now. The real action will start if those "safety nets" break.

This has gone viral with over 2 million hits; it had 26,000 hits when I first saw it 2 days ago.

http://www.youtube.com/watch?feature=pl ... pAOwJvTOio

Several difference between the sub-prime student loan crisis and the sub-prime real estate loan crisis.

When the sub-Prime loan crisis shut the over night credit system between the banks ( the trust between banks ) down in the 2007-2008 time frame there was a big difference in both perception and reality.

A huge percentage of the sub-prime real estate loans were privately insured by banks, and the banks were generally recognized, or feared to be, bankrupt and unable to meet their obligations because of the sub-prime real estate loans that were privately insured. In addition Freddie Mac and Fannie Mae were perceived, in the worse case scenario, to be private entity insurers who could also go bankrupt without paying off the loan guarantees.

We have spent the last five years moving Trillions of dollars worth of sub-Prime real estate risk ( liability ) from the banks to the U.S. Government. The U.S. government assuming the liabilities of Fannie Mae and Freddie Mac was the first step, but the systematic refinancing of mortgages insured by private banks using mortgages insured by the U.S. federal government has been a huge ongoing part of it.

The sub-prime student loan crisis by contrast, starts out ahead of where the sub-prime real estate crisis is today. Virtually all the sub-prime student loans either already have the U.S. Federal government as the lender, or the Federal Government fully insures the private lenders of the rest of these sub-prime student loans.

Both the sub-prime real estate loans and the sub-prime student loans, or at least a huge portion of them, remain unfunded liabilities of the U.S. government not included in the 16 Trillion Dollar National Debt, but today the sub-prime student loan crisis does not pose the kind of threats ( either the real threats or the perceived threats ) to the banking system that the sub-prime real estate crisis did in 2007-2008.

[Reality Check]

FYI, there is another huge difference between sub-Prime real estate loans and sub-Prime student loans.

If a mortgage holder fails to make even a single, full monthly payment, they are in default. If they make a partial payment they are in default.
The only way to cure the default is to make all back payments, plus penalties, plus fees, plus default interest, in full.

By contrast federally insured student loans are much, much different.

Unemployed people are entitled to an exemption of at least six months from making any payments on their student loans and they are not in default during that time and the differed interest is simply added to their loan.

Even if not entitled to an out right exemption from making all payments, all student loan holders ( those with federally insured student loans ) can have their monthly payment amount reduced to a small percentage of their actual income. Full payments are not required to avoid default.

These exemptions and payment adjustments may be applied for, and must be granted retroactively, by Federal Law. This is true regardless of when the loan was issued or who the money is owed to, or who is servicing the loan, as long as it is a student loan insured by the U.S. Federal government.

One must be exceptionally ignorant and exceptionally lazy and exceptionally destitute and exceptionally isolated from any family that could provide modest amounts of help to remain in default for over six months on a student loan insured by the U.S. federal government.

In addition to all the above there are other federal government programs that will pay the interest for you on your student loan and delay making any payments for years.

Loan forgiveness is also provided for after a certain period of time of being unable to make full payments.

The point of all this is even wide spread loss of jobs will not precipitate mass defaults on student loans the way such loss of jobs will trigger mass defaults on mortgages.

[Higgenbotham]

I just want to mention something I saw the other week. Bernake was testifying that the current economic malaise can't be nearly as bad as that of the 1930s because we have "safety nets" like unemployment compensation and food stamps. Reminded me of his earlier statements that "subprime is contained". As far as being right part of the time, "subprime (wa)s contained" for a while and we still have "safety nets", for now. The real action will start if those "safety nets" break.

This has gone viral with over 2 million hits; it had 26,000 hits when I first saw it 2 days ago.

http://www.youtube.com/watch?feature=pl ... pAOwJvTOio

Several difference between the sub-prime student loan crisis and the sub-prime real estate loan crisis.

I would characterize the differences as follows.

Student loan defaults will not result in the bankruptcy of educational institutions in most cases, though it possibly could in the case of some of the for-profit institutions. The subprime defaults resulted in the bankruptcy of some financial institutions that were absorbed into other financial institutions.

A student loan does not get wiped out in a bankruptcy; the person is always liable for it under existing law. A subprime loan gets wiped out in a bankruptcy (normally) and the person can carry on with a reduced debt burden.

At this point, the default on a substantial amount of government guaranteed debt will have added impact on the US government credit rating. In 2008, the US government was far from having any damage to its AAA credit rating; it wasn't until 2011 that the US government credit rating was downgraded.

[Reality Check]

The subprime (real estate ) defaults resulted in the bankruptcy of some financial institutions that were absorbed into other financial institutions.

This was true in the 2007 / 2008 / 2009 time frame. Same would not be true today, if there where mass job losses, to anywhere near the scale.

During the last five years mortgage interest rates have been kept exceptionally low on "agency backed Mortgages" by the FED quantitative easing programs QE1, QE2, and QE3. 30 year mortgage is in the range of 3 to 4 percent today, 15 year in the range of 2 to 3 percent. Few people alive today have every seen mortgage rates anywhere near that low, prior to 2007.

This has allowed banks to re-finance "privately insured mortgages" with "agency insured mortgages" transferring the risk of loss on these mortgages from private banks to the U.S. government.

[Reality Check]

A student loan does not get wiped out in a bankruptcy; the person is always liable for it under existing law.

Under existing law a student loan ( federally insured student loans ) would not force anyone into bankruptcy because the student loan payments are reduced to income level. This is quite different than the situation with a mortgage.

Student loans are also forgiven under federal laws if reduced payments do not pay it off after a certain number of years.

Any difference in payments to the lender are made up by the federal government on federally insured student loans. The U.S. taxpayer picks up the difference.

So educational institutions, and all other private lenders, are not at risk for federally insured student loans.

These losses only show up as increased federal deficits in the year the tax payer makes up the difference in the loan payments. The U.S. Debt does not include student loan guarantee obligations as part of the 16 Trillion Dollar U.S. debt.

[Higgenbotham]

As far as speculation on the impact of student loan defaults, I would add these thoughts.

First would be why are such a high percentage choosing to default. It could be for any number of reasons. As an example, one reason could be that they intend to become part of the underground economy or to leave the country. I have no idea.

Another would be the impact to the income of the educational institutions and whether that will result in salary reductions or job cuts. Again, I have no idea.

And another would be whether there would be real impact to the US government credit rating if, say, the default rate expands from the quoted $120 billion or so to, let's say, half a trillion. Half a trillion is not a lot when compared against the existing mass of debt. But there comes a point when people realize that this is just not working. If students can't get educated and find jobs that pay their loans, the problem is greater than a half a trillion problem in the long run because there is no tax revenue from those individuals, only losses.

[Reality Check]

As far as speculation on the impact of student loan defaults, I would add these thoughts.

First would be why are such a high percentage choosing to default. It could be for any number of reasons. As an example, one reason could be that they intend to become part of the underground economy or to leave the country. I have no idea.

Another would be the impact to the income of the educational institutions and whether that will result in salary reductions or job cuts. Again, I have no idea.

And another would be whether there would be real impact to the US government credit rating if, say, the default rate expands from the quoted $120 billion or so to, let's say, half a trillion. Half a trillion is not a lot when compared against the existing mass of debt. But there comes a point when people realize that this is just not working. If students can't get educated and find jobs that pay their loans, the problem is greater than a half a trillion problem in the long run because there is no tax revenue from those individuals, only losses.

I apologize, but what percentage of the total student loan debt has already defaulted did you say ?

Is the answer to that also:

I have no idea.

?

[Reality Check]

As far as speculation on the impact of student loan defaults, I would add these thoughts.

First would be why are such a high percentage choosing to default. It could be for any number of reasons. As an example, one reason could be that they intend to become part of the underground economy or to leave the country. I have no idea.

Another would be the impact to the income of the educational institutions and whether that will result in salary reductions or job cuts. Again, I have no idea.

One could add to this type of speculation:

The sun going to go nova tomorrow. I have no idea.

[Higgenbotham]

Under existing law a student loan (federally insured student loans) would not force anyone into bankruptcy because the student loan payments are reduced to income level. This is quite different than the situation with a mortgage.

It would be my guess that many of these graduates are going bankrupt and defaulting on all their debt including the student loans, but I don't know that.

If someone doesn't pay their mortgage as agreed in the document, the lender can modify the agreement or foreclose. The modification is going to be within existing market conditions though and not dependent on income. Someone can go through foreclosure and not go bankrupt by choosing to remain timely with their other obligations. A long time ago, I used to buy foreclosures and in doing so had to read through many foreclosure case files at the courthouse. Sometimes bankruptcies were involved with those those but often times not.

[Higgenbotham]

I apologize, but what percentage of the total student loan debt has already defaulted did you say ?

I didn't say.

Is the answer to that also:

I have no idea.

?

No.