Unsecured Student Loans create no loss for the Lender

 

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In a private student loan a “lender” loans the money.   The stories are endless as the “loan officer” encourages the student to increase the amount of the loan to cover books, living expenses and of course, other college expenses like alcohol, car payments and iPhones.  Once again, we encounter the exact opposite of what any reasonable lender would do because any real lender would want to make sure that the loan gets repaid. The higher the principal the less likely the loan will be performing. That is known throughout the lending industry (except in mortgage loans). These loans are unsecured.

So in essence, the “lender” receives an incomplete guarantee from the government. That is because of the risk of loaning money to a young unproven person. The guarantee is supposed to keep the interest rate down but for a while the interest rates were approaching 18%, especially on loans in default. The loans also cannot be discharged in bankruptcy, so the risk of loss is minimal or zero, in the end.

THEN the student loan was tossed into that food processor that we now know is a basket of lies — including false claims of securitization. Here is the thing. The issue of risk has already been addressed. So (1) can the government guarantee be sold or securitized? Does that not interfere with the purpose of the loan infrastructure where lenders would be lenders and would underwrite loans in a manner consistent with the projected ability to pay? (2) since the risk of loss is essentially minus (not even zero) because the “lenders” are either immediately selling the loan or just using the money of investors (like mortgage loan “securitization”) why should the private student loans be exempt from discharge in bankruptcy? (3) we have the same problem as the securitized mortgages present — who is the creditor and who can prove it?

5 Responses

  1. Why those rascals!

  2. in the old days — went to a bank, they then sold to Freddie Fannie, FHA, or VA. But, your Lender remained the bank you borrowed money from. Private securitization should not have changed that process. However, if you went to a non-bank “lender” — such as Countrywide, Argent, Ameriquest, New Century – they were not your actual lender. A bank — one of the large ones, was providing warehouse lending to them – and they were the Lender. The loans have to have been on SOMEONE’s balance sheet before they are securitized. Securitization is simply the removal of cash flows from on balance sheet to an off-balance sheet conduit. Only cash flows were to be passed through. Once a loan is reported in default, it is “SWAPPED” out of the the trust and put back on the balance sheet of the actual lender. No trust EVER lends directly to borrowers — and borrowers should have no business with that trust – or concern. That is why borrowers can'[t challenge the PSA- it has nothing to do with them. So, borrowers need to know the chain of ON balance sheet accounting to determine who is the LENDER or successor. The problem is that none of these private loans ever went on anyone’s balance sheet. Hence, once this was discovered, we had the financial collapse. All these loans are/were classified as distressed debt from the onset. And, the accounting of them is very different, fraudulent, and caused the collapse. .

  3. ANON- in simple terms, please chart the course by which the end “borrower”, whether a student, mortgagors, or vehicle owner receives “money” by means of this convoluted chain of people. I can tell by many of the questions/statements here that a number of readers don’t fully grasp this basic premise. Thanks.

  4. No borrower should have any concern or association with securitization. .Only a “LENDER” is relevant. Securitization does NOT provide direct lending to any borrower –whether student, mortgage, auto or any other loan. Securitization is only removal of on balance sheet loan to off balance sheet conduit. The LENDER remains. Securization should be NO CONCERN for the borrower. ONLY the LENDER matters. Again, no trust, or security EVER lends directly to the borrower. And, therefore, can never be the LENDER, or it’s successor. Not ever.

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