David Dayen at Vice: Billions in Student Debt could Disappear because of Lost Paperwork

Billions in Student Debt Could Disappear Because of Lost Paperwork

The latest example of America’s legal system being a total shitshow might actually help you out—if it doesn’t screw you over first.

In 2006, Pablo Ramirez took out a private loan to attend Westwood College, a now-shuttered for-profit diploma mill in Fort Worth, Texas. Eight years later, he got a court document in the mail: Without his knowledge, he said, a company called National Collegiate Student Loan Trust had won a judgment against him for defaulting on that loan and was demanding roughly $50,000. When Ramirez challenged the ruling, he learned something even stranger.

National Collegiate did not seem to have any actual evidence it owned the debt.

The judgment against Ramirez was eventually overturned this March because National Collegiate “had failed to demonstrate that it was the holder of the note,” as an appeals court found. Ramirez hadn’t kept up with his payments, but at least for now, he’s off the hook.

Thousands of private student loan borrowers may find themselves in the same situation, according to a massive New York Times report this week that’s bringing new attention to a uniquely American legal nightmare. At least $5 billion in defaulted loan debt might not be collectible, potentially bailing out tens of thousands of student debtors.

If this sounds familiar, that’s because it is. One of the huge problems America had to deal with in the mortgage market after the collapse of the housing bubble in 2007 and 2008 centered on something called “chain of title.” Millions of securitized mortgages lacked these “chains,” essentially the ownership record passed down from sellers to buyers. Banks covered for this glaring fuck-up by mass-producing false documents to paper over inaccuracies. Judges mostly played along, but they haven’t given National Collegiate the same courtesy.

Check out this look at how America’s criminal justice systems preys on the poor.

So far, this student loan mess only seems to affect some private loans, which represent about 7.5 percent of the total student loan market, according to data collected by analyst Measure One. Private loans were mostly phased out in 2010 after the feds took over the market; they’re primarily used today to attend sketchy for-profit colleges that, by law, cannot rely entirely on federal financing. Many of these for-profit college loans, which target vulnerable students, have been found to be deceptive.

Before 2010, private student loans were often securitized, just like subprime housing loans before the financial crisis. What this means is that a student would take out the loan, and the lender would bundle it with hundreds of others and sell them through multiple transactions into a trust. The trust would then issue bonds based on the student debt and sell them to investors around the world. The trust would then hire a servicer to take in monthly payments from students, and that money would pass back to investors.

This is where National Collegiate got into trouble. According to an audit of the company’s loan servicer, the Pennsylvania Higher Education Assistance Agency (PHEAA), National Collegiate never received assignments of the loans in its trusts, which would establish the transfer of ownership. In fact, “100 percent of the accounts did not contain an assignment,” the audit found.

How could this be? Why would a company buying hundreds of thousands of loans never secure the proper paperwork showing they actually owned them? The audit hints at a reason: money. The lender assured National Collegiate and its servicer that it could figure out ownership documentation after the fact—if needed. “This became a standard process as it was a less costly option,” according to the audit. After all, many people with student loan debt don’t challenge default judgments, so it made some sense for National Collegiate’s powers that to be to think cutting corners wouldn’t be too costly.

Now that might change. Already, in case after case, from New Hampshire to Ohio, the lender has been found to not actually have possession of the documentation necessary to prove ownership. In hundreds of other instances, according to the Times, National Collegiate has been dismissing cases as soon as they’re challenged to provide docs. That means Pablo Ramirez and other borrowers who stopped paying their loans are getting off scot-free.

All of this might sound vaguely unfair. Why should Ramirez get a break when millions of other former students have to pay? Well, just like borrowers have obligations (to pay their debts), so, too, do lenders. Pablo Ramirez didn’t force the company that took out his loan to engage in multiple complex transactions and then forget to turn over the ownership documents. If National Collegiate is going to aggressively pursue borrowers who fall behind on their loans, proving it owns the debt in question seems like a pretty barebones ask.

Without that requirement, I could walk into a court and announce that Pablo Ramirez—or, for that matter, Donald Trump—owes me money. The system of commerce America has established for centuries relies on proof of ownership. It’s been thrown into disarray in the last few decades, but in theory, at least, this is still how things work.

The real problem here is the near-total lack of accountability for financial companies lending people money in America. In fact, despite numerous no-fault settlements, banks continue to fabricate documents and kick people out of their homes based on false mortgage evidence. It’s no surprise that these tactics have begun to migrate to other kinds of loans. JPMorgan Chase was fined $136 million two years ago for selling credit card debts to collectors with inaccurate and fabricated information. Now we’re seeing the shady behavior crop up in student loans, and you can be virtually certain that National Collegiate isn’t the only offender.

What this comes down to is America failing to defend property records laws by imposing real consequences on violators. In that sense, it was all too predictable that ownership records, from housing to student loans, would turn into cesspools. And it’s worth bearing in mind that way more borrowers are harmed by this chaos than are bailed out.

Maybe someday we’ll hold companies like National Collegiate as responsible for their obligations as we do borrowers who aren’t quite as lucky as Pablo Ramirez.

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The Consumerist: Complaints About Student Loan Servicing Increased 429% In Past Year

Complaints About Student Loan Servicing Increased 429% In Past Year

In the past year, federal regulators and consumer advocates have highlighted issues with student loans and the servicing of these often crippling debts: from finding that educational loans continue to haunt older borrowers, to suing Navient, the largest student loan servicing company. Because of this, it might not come as much of a surprise that the number of complaints the Consumer Financial Protection Bureau received related to student loans has skyrocketed. 

Today, the Bureau released its monthly complaint snapshot [PDF], which shows a 429% increase in student loan complaints received in a year-to-year comparison of just three months.

According to the report, the CFPB received 2,913 complaints from Dec. 2016 to Feb. 2017, a significant increase from the 551 complaints written between Dec. 2015 to Feb. 2016.

The CFPB notes that the surge in complaints is likely tied not only to an increased awareness of student loan servicing issues, but the fact that the Bureau updated its intake form on accepting complaints in Feb. 2016.

Additionally, the Bureau believes that taking “major enforcement action” against a student loan servicer contributed to a student loan complaint volume spike in Jan. 2017.

The CFPB doesn’t explicitly name the company, but the Bureau — along with two states — sued Navient, alleging the company cheated borrowers out of repayment rights.

While the CFPB didn’t provide specific complaint volume for that time, the snapshot shows that Navient was the tenth most complained about company from Oct. 2016 to Dec. 2016, receiving an average of 236 complaints each month.

When the complaints are compared to the same three-month period in Oct. 2015 to Dec. 2015, the CFPB found a 52% increase. In all, the Bureau says it received 10,637 student loans-related complaints for all of 2016.

Rohit Chopra, senior fellow at the Consumer Federation of America, is a former assistant director and student loan ombudsman for the CFPB. He tell Consumerist that Bureau’s snapshot is just the latest finding in a loan line of data point that show signs of big trouble in the broken student loan market.

“The agency’s lawsuit against Navient was a wake-up call to many borrowers that they too may have been preyed upon by the company’s illegal conduct,” he says of the increases, adding that borrowers may also be filing more complaints with the CFPB because companies are more likely to provide an in-writing response through this portal.

Suzanne Martindale, staff attorney for Consumer Union, tells Consumerist that the CPFB’s report provides just another reason why a strong consumer watchdog is needed.

“If anything, this increase shows that there’s a real problem out there – and that consumers increasingly rely on the CFPB to stand up for them,” she said, noting that CFPB provides an outlet for people who would otherwise suffer in silence when financial companies mistreat them.

Other Highlights

The CFPB’s monthly snapshot of complaints also highlighted issues with credit card companies and a national complaint overview.

As of March 1, 2017, the Bureau says it has handled approximately 116,200 credit card complaints, many involving issues related to being billed for fraudulent charges, confusion over reward programs, and being the victims of identity theft.

Of the complaints the CFPB received, the most involved Citibank, Capital One, and JPMorgan Chase. These companies received about 90% of all credit card complaints received by the Bureau from Oct. 2016 to Dec. 2016.

Wells Fargo received the greatest increase credit card complaints — about 99% — when comparing consumer gripes between Oct. 2015 and Dec. 2015 to those received between Oct. 2016 to Dec. 2016.

While the CFPB doesn’t mention it, the increased complaints came immediately after Wells Fargo’s fake account fiasco was uncovered.

In Sept. 2016, the CFPB — along with the Office of the Comptroller of the Currency and the Los Angeles city attorney — ordered the bank to pay $185 million in refunds and penalties after finding that employees opened nearly two million unauthorized consumers accounts in order meet high-pressure sales quotas.

While student loans and credit card companies accounted for many complaints received by the CFPB, it was actually debt collection that was the most-complained about financial product or service.

Of the approximately 26,000 complaints handled in February, there were 7,755 complaints about debt collection.

The second most-complained-about consumer product was credit reporting — accounting for 4,902 complaints — followed by mortgages, which accounted for 3,718 complaints.

Levitin and Yves Smith – TRUST=EMPTY PAPER BAG

Living Lies Narrative Corroborated by Increasing Number of Respected Economists

It has taken over 7 years, but finally my description of the securitization process has taken hold. Levitin calls it “securitization fail.” Yves Smith agrees.

Bottom line: there was no securitization, the trusts were merely empty sham nominees for the investment banks and the “assignments,” transfers, and endorsements of the fabricated paper from illegal closings were worthless, fraudulent and caused incomprehensible damage to everyone except the perpetrators of the crime. They call it “infinite rehypothecation” on Wall Street. That makes it seem infinitely complex. Call it what you want, it was civil and perhaps criminal theft. Courts enforcing this fraudulent worthless paper will be left with egg on their faces as the truth unravels now.

There cannot be a valid foreclosure because there is no valid mortgage. I know. This makes no sense when you approach it from a conventional point of view. But if you watch closely you can see that the “loan closing” was a shell game. Money from a non disclosed third party (the investors) was sent through conduits to hide the origination of the funds for the loan. The closing agent used that money not for the originator of the funds (the investors) but for a sham nominee entity with no rights to the loan — all as specified in the assignment and assumption agreement. The note and and mortgage were a sham. And the reason the foreclosing parties do not allege they are holders in due course, is that they must prove purchase and delivery for value, as set forth in the PSA within the 90 day period during which the Trust could operate. None of the loans made it.

But on Main street it was at its root a combination pyramid scheme and PONZI scheme. All branches of government are complicit in continuing the fraud and allowing these merchants of “death” to continue selling what they call bonds deriving their value from homeowner or student loans. Having made a “deal with the devil” both the Bush and Obama administrations conscripted themselves into the servitude of the banks and actively assisted in the coverup. — Neil F Garfield, livinglies.me

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.


John Lindeman in Miami asked me years ago when he first starting out in foreclosure defense, how I would describe the REMIC Trust. My reply was “a holographic image of an empty paper bag.” Using that as the basis of his defense of homeowners, he went on to do very well in foreclosure defense. He did well because he kept asking questions in discovery about the actual transactions, he demanded the PSA, he cornered the opposition into admitting that their authority had to come from the PSA when they didn’t want to admit that. They didn’t want to admit it because they knew the Trust had no ownership interest in the loan and would never have it.

While the narrative regarding “securitization fail” (see Adam Levitin) seems esoteric and even pointless from the homeowner’s point of view, I assure you that it is the direct answer to the alleged complaint that the borrower breached a duty to the foreclosing party. That is because the foreclosing party has no interest in the loan and has no legal authority to even represent the owner of the debt.

And THAT is because the owner of the debt is a group of investors and NOT the REMIC Trust that funded the loan. Thus the Trust, unfunded had no resources to buy or fund the origination of loans. So they didn’t buy it and it wasn’t delivered. Hence they can’t claim Holder in Due Course status because “purchase for value” is one of the elements of the prima facie case for a Holder in Due Course. There was no purchase and there was no transaction. Hence the suing parties could not possibly be authorized to represent the owner of the debt unless they got it from the investors who do own it, not from the Trust that doesn’t own it.

This of course raises many questions about the sudden arrival of “assignments” when the wave of foreclosures began. If you asked for the assignment on any loan that was NOT in foreclosure you couldn’t get it because their fabrication system was not geared to produce it. Why would anyone assign a valuable loan with security to a trust or anyone else without getting paid for it? Only one answer is possible — the party making the assignment was acting out a part and made money in fees pretending to convey an interest the assignor did not have. And so it goes all the way down the chain. The emptiness of the REMIC Trust is merely a mirror reflection of the empty closing with homeowners. The investors and the homeowners were screwed the same way.

BOTTOM LINE: The investors are stuck with ownership of a debt or claim against the borrowers for what was loaned to the borrower (which is only a fraction of the money given to the broker for lending to homeowners). They also have claims against the brokers who took their money and instead of delivering the proceeds of the sale of bonds to the Trust, they used it for their own benefit. Those claims are unsecured and virtually undocumented (except for wire transfer receipts and wire transfer instructions). The closing agent was probably duped the same way as the borrower at the loan closing which was the same as the way the investors were duped in settlement of the IPO of RMBS from the Trust.

In short, neither the note nor the mortgage are valid documents even though they appear facially valid. They are not valid because they are subject to borrower’s defenses. And the main borrower defense is that (a) the originator did not loan them money and (b) all the parties that took payments from the homeowner owe that money back to the homeowner plus interest, attorney fees and perhaps punitive damages. Suing on a fictitious transaction can only be successful if the homeowner defaults (fails to defend) or the suing party is a holder in due course.

Trusts Are Empty Paper Bags — Naked Capitalism


Just as with homeowner loans, student loans have a series of defenses created by the same chicanery as the false “securitization” of homeowner loans. LivingLies is opening a new division to assist people with student loan problems if they are prepared to fight the enforcement on the merits. Student loan debt, now over $1 Trillion is dragging down housing, and the economy. Call 520-405-1688 and 954-495-9867)

The Banks Are Leveraged: Too Big Not to Fail

When I was working with Brad Keiser (formerly a top executive at Fifth Third Bank), he formulated, based upon my narrative, a way to measure the risk of bank collapse. Using a “leverage” ration he and I were able to accurately define the exact order of the collapse of the investment banks before it happened. In September, 2008 based upon the leverage ratios we published our findings and used them at a seminar in California. The power Point presentation is still available for purchase. (Call 520-405-1688 or 954-495-9867). You can see it yourself. The only thing Brad got wrong was the timing. He said 6 months. It turned out to be 6 weeks.

First on his list was Bear Stearns with leverage at 42:1. With the “shadow banking market” sitting at close to $1 quadrillion (about 17 times the total amount of all money authorized by all governments of the world) it is easy to see how there are 5 major banks that are leveraged in excess of the ratio at Bear Stearns, Lehman, Merrill Lynch et al.

The point of the article that I don’t agree with at all is the presumption that if these banks fail the economy will collapse. There is no reason for it to collapse and the dependence the author cites is an illusion. The fall of these banks will be a psychological shock world wide, and I agree it will obviously happen soon. We have 7,000 community banks and credit unions that use the exact same electronic funds transfer backbone as the major banks. There are multiple regional associations of these institutions who can easily enter into the same agreements with government, giving access at the Fed window and other benefits given to the big 5, and who will purchase the bonds of government to keep federal and state governments running. Credit markets will momentarily freeze but then relax.

Broward County Court Delays Are Actually A PR Program to Assure Investors Buying RMBS

The truth is that the banks don’t want to manage the properties, they don’t need the house and in tens of thousands of cases (probably in the hundreds of thousands since the last report), they simply walk away from the house and let it be foreclosed for non payment of taxes, HOA assessments etc. In some of the largest cities in the nation, tens of thousands of abandoned homes (where the homeowner applied for modification and was denied because the servicer had no intention or authority to give it them) were BULL-DOZED  and the neighborhoods converted into parks.

The banks don’t want the money and they don’t want the house. If you offer them the money they back peddle and use every trick in the book to get to foreclosure. This is clearly not your usual loan situation. Why would anyone not accept payment in full?

What they DO want is a judgment that transfers ownership of the debt from the true owners (the investors) to the banks. This creates the illusion of ratification of prior transactions where the same loan was effectively sold for 100 cents on the dollar not by the investors who made the loan, but by the banks who sold the investors on the illusion that they were buying secured loans, Triple AAA rated, and insured. None of it was true because the intended beneficiary of the paper, the insurance money, the multiple sales, and proceeds of hedge products and guarantees were all pocketed by the banks who had sold worthless bogus mortgage bonds without expending a dime or assuming one cent of risk.

Delaying the prosecution of foreclosures is simply an opportunity to spread out the pain over time and thus keep investors buying these bonds. And they ARE buying the new bonds even though the people they are buying from already defrauded them by NOT delivering the proceeds fro the sale of the bonds to the Trust that issued them.

Why make “bad” loans? Because they make money for the bank especially when they fail

The brokers are back at it, as though they haven’t caused enough damage. The bigger the “risk” on the loan the higher the interest rate to compensate for that risk of loss. The higher interest rates result in less money being loaned out to achieve the dollar return promised to investors who think they are buying RMBS issued by a REMIC Trust. So the investor pays out $100 Million, expects $5 million per year return, and the broker sells them a complex multi-tranche web of worthless paper. In that basket of “loans” (that were never made by the originator) are 10% and higher loans being sold as though they were conventional 5% loans. So the actual loan is $50 Million, with the broker pocketing the difference. It is called a yield spread premium. It is achieved through identity theft of the borrower’s reputation and credit.

Banks don’t want the house or the money. They want the Foreclosure Judgment for “protection”


Student Loans, Housing and Poverty in the U.S.

“Bottom Line: Foreclosures need to stop, student loans need to be modified and return to pre-2005 rules for dischargeability, wages need to rise and the number of people earning wages needs to rise. If you don’t have those ingredients, the economic “recovery” will forever be fragile and will forever be in danger of a much deeper collapse than we saw in 2008 because underlying conditions are worse. That’s why American companies are holding trillions in cash and assets overseas. They don’t trust us anymore.” — Neil F Garfield, livinglies.me

For assistance with presenting a case for wrongful foreclosure and student loans, please call 954-495-9867 (East Coast) 520-405-1688 (West Coast), customer service, who will guide you to our information resources and upon request put you in touch with an attorney in the states of Florida, Tennessee, Georgia, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Analysis: According to the official figures there are around 50 million people living below the poverty line. Surveys show that the number of people who can’t buy essentials for their family actually total close to 150 million people, which is half the country. The unemployment rate, if one were to add the number of people who are underemployed or who have given up looking for work, is probably over 20% — 60 million people!

The chasm referred to as income and wealth inequality is growing daily. $1 trillion in debt burdens students who could be far more productive. Until 2005, this debt was dischargeable in bankruptcy. But the banks managed to get changes made in the bankruptcy code equating student debt with alimony and child support and further requiring means testing in chapter 7 thus inhibiting the discharge of debts on credit cards charging 20% or more per year in interest and medical costs, which if you read Brill’s article in Time Magazine last week, are marked up 3000%.

Some $13 trillion in mortgage loans were faked and the banks continue to lie to the President, the Congress, the state legislatures, governors and Attorneys general.

If you add it all up, it isn’t hard to see why economists refer to the “recovery” as fragile. If you ask me it is unjust, wrong and impractical to continue on the same path we are on in the hopes that down the road somehow we will grow out of the problem we have — an economy that benefits a few people while the number of people falling behind, with lower and lower wages and decreased accessibility to credit increasing every month. Billions are added each month in student loan debt which is fast becoming a cancer on our society simply because of the new bankruptcy provisions.

The 7 year experiment in making student loans non-dischargeable is a miserable failure. It is a major contributor to the impending decline in the credit rating of the what was once the strongest nation on earth in every way. Because we allowed the banks to get the TARP funds and all the other forms of bank bailouts, and because we ignored the real victims — the investors and the homeowners who were tricked into deals that could not possibly work, the foundation of the country has been so undermined that we now rank #10 behind France and Spain in upward economic mobility. That means that the chances are better in those countries to climb the ladder of success than they are here.

This is not a piece suggesting we convert to socialism as our economic path. It is rather a call-out to our government that it cannot continue to bow to the will of the banks and expect the country to hold together. With half the country gasping for air, we must jettison our ideology and go for the practical solutions — most of which already exist or existed until a short while ago.

The problem is not that capitalism isn’t working. The problem is that capitalism is being used as a cover for the creation of illusions of prosperity and the reality of a near fascist state. That is what happens when someone corners the market on oranges and that is what happens when the someone is allowed to corner the market on money. And THAT is why we need government regulators and legislators who are NOT permitted to go through the revolving door from government to business and back again. If you take the referees off the field, don’t be surprised with what happens next.

For better or worse our economy is still 70% dependent upon consumer spending. Yet we pursue policies that diminish the ability of consumers to spend and diminish the number of consumers. The fact that there is still some muscle in the our system is testament to our inner strengths and prospects if we make the necessary changes to our democratic institutions and reign in those who are admittedly too large to govern or regulate.

Despite the obvious fundamental defects in the loan originations and transfers of loans that were the products of imagination and illusion, we treat them as real and even sacred. The playing field has been tilted so that all the benefits roll into one corner while the rest of us scramble to  make ends meet. The risk factors in any loan or program have been pushed entirely over into the public sector when the government should be able to stop the foreclosures, cure the student defaults and renew the progress of wage growth.

The keys to end this nightmare here and abroad is housing, student loans and employment. Students who have unpayable student loans are refused employment because many employers do credit checks. The same holds true for the millions of Americans who have been victims of fake foreclosures by strangers who never put up a dime to fund or purchase the loan and then submitted a credit bid at the “auction.” The private student loans arose because somebody thought it was a good idea to raise the cost of student loans by inserting profit seeking banks as intermediaries. Now that is corrected as to future loans, but it does nothing to correct the problems of past mistakes by government.

This isn’t just theory. Trillions of dollars are being held off shore by companies who legitimately are not convinced that the U.S. will actually pull out of this spiral anytime soon. So they are investing in capital and labor elsewhere. No effort has been made to claw back the trillions of dollars that disappeared in the maelstrom of the mortgage meltdown. Those funds are hidden off shore too.

And even more importantly, no company wants to invest in a marketplace where the laws are not enforced with consistency. If you speak with many CEO’s in private they will tell you that jail time for bankers would be a stimulus to confidence in the U.S. marketplace. What we have is a marketplace without boundaries as to the the fraud and other criminal behavior that was never before tolerated in our system.

Large and medium sized organizations holding trillions of dollars in liquid assets and other investments overseas see this very clearly. They have no more reason to commit to the U.S. economy than they do to any other banana  republic.

Why Student Debt Will Make U.S. Insolvent

Wall Street turns profit in student loan debt

Student Debt Crushes Borrowers And Threatens The U.S. Economy


Don’t Panic: Wall Street Is Going Crazy For Student Loans — But It’s Not a Bubble http://www.theatlantic.com/business/archive/2013/03/dont-panic-wall-street-is-going-crazy-for-student-loans-but-its-not-a-bubble/273682/

You Know What Sucks? Your Student Debt. You Know What’s Great? The Solution.

Shocking Bubble in Student Loans Adds to Economic Woes

If you are seeking legal representation or other services call our Florida customer service number at 954-495-9867 and for the West coast the number remains 520-405-1688. Customer service for the livinglies store with workbooks, services and analysis remains the same at 520-405-1688. The people who answer the phone are NOT attorneys and NOT permitted to provide any legal advice, but they can guide you toward some of our products and services.
The selection of an attorney is an important decision  and should only be made after you have interviewed licensed attorneys familiar with investment banking, securities, property law, consumer law, mortgages, foreclosures, and collection procedures. This site is dedicated to providing those services directly or indirectly through attorneys seeking guidance or assistance in representing consumers and homeowners. We are available to any lawyer seeking assistance anywhere in the country, U.S. possessions and territories. Neil Garfield is a licensed member of the Florida Bar and is qualified to appear as an expert witness or litigator in in several states including the district of Columbia. The information on this blog is general information and should NEVER be considered to be advice on one specific case. Consultation with a licensed attorney is required in this highly complex field.

Editor’s Comments: First let me say in the interest of transparency that I favor all education to be paid by the government from pre-k through graduate school. My reason is simple — a well informed well educated populace will be more productive, more competitive and less easily fooled by politicians issuing sound bites instead of facts. Information is king. If you want to progress toward the American dream it is no longer evident that working with your hands will get you there. You have to know things that employers need you to know and you have to process things cognitively that only a good education can instill.

Back to reality. The game has been on for at least three decades, perhaps four depending upon how you look at it. Unions were busted  wages declined or stagnated, while corporate profits and bonuses went to dizzying heights, leaving the rest of the country at or near the poverty level.

In lieu of wages, we made credit available that was spent like wages except that you had to spend it twice to be out of debt — once at the point of purchase with your credit card and again in installments at usurious rates when the bill came in. Homeowners were using the homes as ATM machines taking out equity loans just to maintain their standard of living. It doesn’t take an economist to know that one day that bubble had to break when the low wages paid to consumers would be insufficient to cover basic living expenses and certainly insufficient to pay the interest and principal on loans.

Conservatives can blame consumers all they want, but the fact remains that in order to create the illusion of a healthy economy, credit and debt was forced onto 99% of the population while wealth was transferred to the top 1%. To live within your means during this period meant you would live with in the most dangerous run-down neighborhoods with the worst schools. The peer pressure and pressure from life virtually forced the vast majority of Americans to accept debt in lieu of the wages they should have been paid.

Now we have the start of suicide and murders that have littered the landscape during the mortgage meltdown and which continue to this day. I know because I get calls from people who threaten suicide and then do it. It’s like the war in Afghanistan: how many people are aware that there were more suicides than those killed in action in 2012? We are numb to the results and our belief in our institutions is at an all-time low for good reason. This was a gradual process with plenty of people who know a lot about finance and economics screaming “STOP!” but were ignored.

In both the mortgage crisis and the student loan crisis, where defaults are skyrocketing, there is an opportunity for a fiscal stimulus to the country that won’t cost the government a dime. Trillions of dollars of stimulus money is locked up in the banks who have sequestered the money overseas along with Corporate America’s $3 trillion that they are holding and afraid to invest because they see what I see — at best an uncertain future for America and a profound distrust of American institutions to cope with the issues because the government is controlled by big business and big banks. It’s called an oligopoly when a group of companies control the marketplace.

Simple logic: why is it that while unemployment remains high and wages remain too low to survive, that Wall Street and the Dow Jones Industrial Average are reaching historic highs? Somebody is paying for those results. Since we cannot support those results through spending discretionary income because we don’t have any, and since we can’t spend our way out using credit because there isn’t any, Big Banks and Big Business are now burying their heads in the public trough taking corporate welfare and dodging liabilities with the full support of all three branches of government.

Doesn’t it bother anyone that during the last three decades the amount of GDP measured by standard means includes financial services which went from 16% of GDP to nearly 50% of GDP. That means that the loss of real productive businesses has been replaced by trading paper on the same deals over and over again so we maintain the illusion that the United States is an economic superpower. And eventually the euphoria in the stock market will be replaced with something less than that when the correction turns into a crash.

If we really want to save our economy, our world status (aside from military power) and the prospects for future generations we need real jobs with real services and real products to be produced here and to stop treating trading paper as somehow adding to GDP.

The solution is right in front of us. In the mortgage markets, the appraisals were untrue and unsustainable and the responsible party, according to existing law, is the lending entity. The loans were unworkable and bound to fail in both the real estate loans and student loans. And the risk was transferred from the loan originator, which is supposed to be the gatekeeper to undisclosed third parties who funded the loan without any disclosure or documentation provided to the borrower.

In short, predatory loan practices and outright fraud, proven by the robo-signing scandal in which fabrication of entire loan files cost only $95 according to its price sheet, convinced millions of people to borrow sums of money they could never repay on terms that were guaranteed to fail at he borrower level. In the meanwhile, the lenders (investors) were sold a different set of terms. The intermediaries tricked the lender, tricked the borrower and then set out to claim the loans as their own, getting the insurance proceeds and proceeds from credit default swaps and federal bailout.

Look under any rock in the private student loan landscape and you’ll find lost documents, robo-signed documents, fabrications, forgery and perjury. It’s the same tune as the mortgage mess.

In any normal situation where bankers go wild, hundreds of people go to jail and receivers are appointed with the express purpose of clawing back as much as possible to provide restitution and reparation to the victims. Following the existing rule of law, that is exactly what should happen here with real estate loans and student loans. It won’t fix everything, but it will fix a lot more than current policy and give a boost to an ailing economy whose foundation is rotting and cracking under the weight of  shadow banking.

Lawyer’s Student Loans May Driven Him To Murder, Police Say



Bond Buyers Beware: Student Loans Mirror Mortgage Meltdown


What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, Tennessee, Georgia, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Comments: Close your eyes. Imagine an upside down world in which the borrowers are having the most trouble keeping their loans current are the very same loans that investors can’t get enough of. Sound like the mortgage meltdown? That is because Wall Street is using the same business model. “Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.”

So why would fund managers intentionally invest money in which they are most likely to lose money and their jobs? Answer: they wouldn’t. Somehow wall Street has again convinced or coerced fund managers to buy bogus bonds backed by student loans that are spiraling down the toilet even as we speak.

The “experts” attribute the surge to investor demand. I would scratch the surface and see why investor demand was so high, besides the obvious need to increase yield at a time when yields have never been lower.

The problem is that there is still no accountability for these loans or bonds. A young student asks for a loan and the bank showers him with “extra” amounts beyond what he requested. The payment is zero, so it is like free money and the novice financial victim doesn’t have the knowledge or skills to understand the flaws in what is being proposed to him or her.

Before you know it, the $25,000 loan he asked for is now $50,000 to take care of incidentals and living expenses, and the real amount borrowed will go up by anywhere from 6%-15% as interest accumulates is added to the principal. Once out of school, the interest rates shoots up and the next he or she knows, she now has around a $60,000 loan (despite asking for $25,000) with an interest rate of 8%, which means that interest alone is $4800 per year or $400 per month — the payment for a small car and insurance.

The mystery of why demand is so high when on the last round there was such a disaster can only be explained by reference to the sales talk given to fund managers and perhaps some overlapping or conflicting areas of interest.

This is not rocket science. The number of student loans failing is spiking and getting worse every day. Any asset backed security using student loans is depreciated worse than a new car driving off the show room floor. And listening to the bankers selling this stuff is like getting medical advice from a crack dealer.

So why are they putting pension fund money into an obviously failing investment? That is my quest. When I have the answer i will probably be able to further unravel the mortgage backed bonds a little further as well.

I keep  wondering if the bankers are actually doing the same thing they did with the mortgage backed bonds — tell the investor the investment is triple A rated, insured and hedged with credit default swaps. And I wonder if the fund managers understand that the triple A rating is subject to revision down to unrated, and that the insurance and hedges are payable not to the investors but to the investment bankers.

I also wonder if the notes will again disappear because of misrepresentations as to their content, and if the intermediary banks will again retain control over the collection process, create fabricated forged documents and offer of perjured testimony and affidavits from incompetent witnesses?

And I wonder if once again we have a stream of money coming from an unidentified funding source whose name is not included in the closing documents, and who agreed to repayment terms different than those set forth on the promissory note signed by the borrower.

This is why I am including Student Loans as an area of concentration on this blog and I will include other subjects as well that inform and assist those “in trouble” due to the greed and predatory lending tactics used by private bankers. It is worth mentioning that the private banking loans are in the process of being phased out for precisely the reasons stated above.

Now SOMEBODY must be making money on these bad loans and the good loans far in excess of the basis points usually applicable to lending. Where is that profit coming from? It can only come from the investors since they are the only ones who are putting their money at risk.

So to recap, after the mortgage meltdown we have what appears to be a repeat situation going on with student loans. The investment bankers are skimming deeply into investor money before they lend out anything. The loans were mostly bad loans that will eventually fail. The  bankers will collect insurance, credit default swaps and potentially another federal bailout. Nobody ends up with what they wanted except the investment bankers, of course.

Student-Loan Securities Stay Hot

What’s Really Behind the Student Debt Boom

STUDENT DEBT — Reduction Suggested, Especially for Medical Students

The first thing to think about is how many of these student loans were securitized or are subject to claims of securitization and assignments. Based upon anecdotal evidence collected thus far, most of them were securitized. That means that many of the defenses suggested for mortgage foreclosures are equally applicable to student loans. AND it might, as we have previously suggested, provide an opening for avoiding the exemption from discharge in bankruptcy, where student loans ordinarily cannot be discharged.
The level of student debt has exceeded $1 Trillion, which means that either the banks or the government are going to absorb a huge loss financially. If the Banks “Securitized” the loans then they are facing a huge loss if the loans are paid off, which probably explains why the loans were artificially inflated, like the homes. With the homes it was done through fraudulent appraisals using far-out “comparables” that didn’t apply. With private student loans, the banks pushed the students to take on “extra” money for living expenses and even personal expenses that would be considered luxuries.
The reason is as simple as mortgage meltdown. The debts, the fees and the marketing of these debts were all facets in making medicine — the practice and the protocols — all about the money. Doctors or nurses and other medical people who might want to live in a peaceful small town can’t go there because they are required to keep their income up in order to pay back student debt obligations which are non dischargeable in bankruptcy.
The answer coming from economists is that if we value medicine as a society and the current system is not working because people in all places are dying or suffering as a result of money issues, then it follows that if we want a better society, we should turn the vision of medical people from money to the services we need for our society. Sure the banks will and other people who speak from prepared messages from idealogues are going to scream. But their screams are drowned out  by the grief of those who lose loved ones or watch them suffer.
It doesn’t even make sense economically. If doctors and hospitals were able to turn their debt obligations into something that could be managed without turning away patients in need of medical care, our tax dollars would not be used for the extraordinary expenses of Emergency rooms or procedures that are of doubtful value to the patient but that are necessary to meet the expenses of servicing debt.
Costs would immediately be reduced and we would be on our way back from third world status in the effectiveness of our medical care. We would be able to reduce costs so much that we would be spending the same or less than those countries who provide the same level of care but whose effectiveness is extending life and limiting suffering are by all current measurements far beyond American medicine at half the cost. With costs going down, the profit motive would recede as the helping mode kicked in to remove a huge stresser that interferes with American productivity and innovation.
Our worship of money has distorted the individual values we hold dear. Our society no longer reflects those values and is literally paying for it through the nose. A great number of bankruptcies are filed by people cleaned out by medical expenses that are discharged while the providers never see the relief. The debts that are wiped out include all the debts, not just the target debts like home mortgages, credit cards, student loans etc.
So our current system is unfair, it is too expensive only because of the cost of education, which is prohibitive even with loans, and it is by most accounts declining in quality except for certain procedures on which we have still cornered the market.
The same holds true where debt gets in the way of the survival or vitality of any processes operating in our society. Obama has taken care of a portion of this for future students. But the existing ones see no way out. And this false morality based upon money rather than God or moral imperatives is now reducing the number and quality of teachers, firefighters, first responders, police and other social services that cannot attract great teachers or leaders because it offers a lifetime of slavery to debt.
At a minimum, household debt should be reduced (like  Iceland did it) for those who provide essential services and largest parts of household debt are student loans and mortgage debt both of which were pushed onto unsophisticated and unsuspecting victims of a society where money and banking are the measurements of success instead of service to our society that we all need and expect if government is to mean anything.
Any person who provides these essential services should be either exempted from repayment unless their salary allows it through a means test, much like they don in Chapter 7 bankruptcies now. It doesn’t matter whether the debt is technically designated as student debt, or credit card debt, consumer finance or mortgage. The facts are that we are paying more and getting less. Instead of investing in improving the education of providers of essential services we are firing them for lack of money or making them spend time and money on trying to wrangle out of the debt.
The two best places to start are the private student loans in which the risk was non-existent thus encouraging banks to sell larger loan packages to prospective students than they needed, and Mortgage debt which was done the same way. There is no reason why such loans should be sanctimoniously regarded as off limits. Veterans of foreign wars were given their education and help in buying houses at low rates and easy payments without any “resets” that would ruin their lives as they lost their homes and lifestyles. This makes no sense in a society seeking to survive and prosper. We are practically punishing those who serve their country and creating economic barriers to those who would serve their country and who have a lot to offer.
Even as the battle rages over principal reductions to banks who never had any risk in underwriting loans thus producing ever larger loan packages that could never be read we ought to listen to economists who point out that we are spiraling down as a society even though it appears as though the stock market, for the moment is going up. It’s a good place to start.

The Debt of Medical Students

Student Loans: The Other Killer of Our Economy


Standing ovation to Yves Smith from Naked capitalism and Moe Tkacik for his article on the 40 year war on students. It is like eating our young. We want a country that is vibrant, that offers hope for advancement, and that provides superior services and products. But we alone make it impossible for most students to justify the cost of higher education.
As Graeber points out in his wonderful book DEBT: The first 5,000 Years, debt is a moral and political issue and has no precise meaning because it refers to money which has no precise meaning. Those dots on a screen are not money. They are representations about comparative wealth. The bullying atmosphere of this country has turned morality on its head. Those that commit the most atrocious acts in dealing with the unsophisticated consumer are allowed to roam free while the lives of their victims are turned into chaos and despair.

We have transformed morality into something that only applies to ordinary folks and not to people who achieve unspeakable wealth. A businessman walks away from building a home because he sees no possibility of profit or even breaking even and there is no stigma against him, he is not prevented from doing so and the bank is stuck with the result. Then along comes the myth of securitization and the bank is not stuck with that result or any other result. And the ordinary person who wants to walk from the the home because there is no hope for profit or breakeven is said to violating some code of morality — even some say a sin against humanity and God.

We want the quality and productivity but we are not willing to pay for it. We did very well when the cost of education was affordable and easily financed and paid for with reasonable assumptions about employment. We are doing terribly now because we got away from that and made education a profit seeking venture for the finance sector.

The banks had a field day when they were allowed to act as intermediaries in the government backed student loan market. All the same things that happened with mortgages were happening with student loans, including the non-dischargeability of a debt.

In my opinion, the government backing should be construed as a non-transferable guarantee to the loan originator. Government backing (i.e, our tax dollars) should not be the vehicle for making money multiple times on the same loans. Nor should the government backing be tacked on as an inducement for investment where diversification addresses the risk of loss. In this case, like the mortgage market, people were encouraged, even pushed into loans they either could not afford or didn’t need.

Just like the mortgage market, with the originator not exposed to any risk, the goal was to move as much money as possible to justify the fees and “trading profits” the investment banks were taking. And just like the mortgage market the only proper remedy is to reduce rates and principal to correctly reflect the value of the loan at origination instead of enforcing the false and fraudulent value of the loan as represented by the originator and its agents.

This may turn out to be a parallel source of litigation and legislation as the country struggles with over $1 trillion in student debt, much of which cannot be paid because the students are unemployed resulting from a recession that was and remains so deep that it rivals the great depression.

Reality check: you can keep those loans and mortgage bonds on the books as long as your accountants and regulators are willing to play the game, but eventually they must be written down to real value. The same holds true for government backed loans. The government must take the hit here because they are the pocket of last resort.

And anyone arguing for “unchaining” restraints on Wall Street is speaking in code to those in the 1%. He is saying “we don’t have to settle for most of the country’s wealth, we can have it all.” But such people ignore history when income and wealth disparity becomes so severe that people cannot keep a roof over their heads or food on the table, things change. My message to those anti-regulators is be careful what you wish for — if you get it, the people might turn around and get you.

Moe Tkacik: Student Debt – The Unconstitutional 40 Year War on Students

Yves here. I’m featuring this post not simply because the student debt issue is coming to serve as a form of debt servitude, but also because the backstory is so ugly. Student debt is the only form of consumer lending where the obligation cannot be discharged in bankruptcy. This story chronicles how persistent bank lobbying, including disinformation portraying student borrowers as likely deadbeats, led to increasingly draconian treatment of student loans. A second reason for posting it is that due to technical difficulties at Reuters, the original ran without the hyperlinks, which are of interest to serious readers.

By Moe Tkacik, a Brooklyn-based journalist who writes at Das Krapital. First published at Reuters.

Lobbyists’ trillion dollar revenge on nerds  

You have probably mentally catalogued the student loan crisis alongside all the other looming trillion dollar crises busy imperiling civilization for the purpose of enriching the already rich. But it is different from those crises in a few significant ways, starting with the fact that the entire student loan business is arguably unconstitutional.

You don’t have to take it from me: a preeminent bankruptcy scholar made precisely this argument under oath before Congress. In December 1975, when Congress was debating the first law that made student loans non-dischargeable in bankruptcy, University of Connecticut law professor Philip Shuchman testified that students “should not be singled out for special and discriminatory treatment,” adding that the idea gave him “the further very literal feeling that this is almost a denial of their right to equal protection of the laws.”

Read more at http://www.nakedcapitalism.com/2012/08/moe-tkacik-student-debt-the-unconstitutional-40-year-war-on-students.html#kqzkfT8tjDj05GZ6.99

Student Loans Are The Next Major Crack in Our Finance


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Disclosure to Student Borrowers: www.nytimes.com/2012/04/08/opinion/sunday/disclosure-to-student-borrowers.html?_r=1&ref=todayspaper

Editor’s Comment: 

“We have created a world of finance in which it is more lucrative to lose money and get paid by the government, than to make money and contribute to society.  In the Soviet Union the government ostensibly owned everything; in America the government is a vehicle for the banks to own everything.”—Neil F Garfield LivingLies.me

While the story below is far too kind to both Dimon and JPMorgan, it hits the bulls-eye on the current trends. And if we think that it will stop at student loans we are kidding ourselves or worse. The entire student loan mess, totaling more than $1 trillion now, was again caused by the false use of Securitzation, the abuse of government guaranteed loans, and the misinterpretation of the rules governing discharge ability of debt in bankruptcy.

First we had student loans in which the government provided financing so that our population would maintain its superior position of education, innovation and the brains of the world in getting technological and mechanical things to work right, work well and create new opportunities.

Then the banks moved in and said we will provide the loans. But there was a catch. Instead of the “private student” loan being low interest, it became a vehicle for raising rates to credit card levels — meaning the chance of anyone being able to repay the loan principal was correspondingly diminished by the increase in the payments of interest.

So the banks made sure that they couldn’t lose money by (a) selling off the debt in securitization packages and (b) passing along the government guarantee of the debt.  This was combined with the nondischargability of the debt in bankruptcy to the investors who purchased these seemingly high value high yielding bonds from noncapitalized entities that had absolutely no capacity to pay off the bonds.  The only way these issuers of student debt bonds could even hope to pay the interest or the principal was by using the investors’ own money, or by receiving the money from one of several sources — only one of which was the student borrower.

The fact that the banks managed to buy congressional support to insert themselves into the student loan process is stupid enough. But things got worse than that for the students, their families and the taxpayers. It’s as though the courts got stupid when these exotic forms of finance hit the market.

Here is the bottom line: students who took private loans were encouraged and sold on an aggressive basis to borrow money not only for tuition and books, but for housing and living expenses that could have been covered in part by part-time work. So, like the housing mess, Wall Street was aggressively selling money based upon eventual taxpayer bailouts.

Next, the banks, disregarding the reason for government guaranteed loans or exemption from discharge ability of student loan debt, elected to change the risk through securitization. Not only were the banks not on the hook, but they were once again betting on what they already knew — there was no way these loans were going to get repaid because the amount of the loans far exceeded the value of the potential jobs. In short, the same story as appraisal fraud of the homes, where the prices of homes and loans were artificially inflated while the values were declining at precipitous rate.

Like the housing fraud, the securitization was merely trick accounting without any real documentation or justification.  There are two final results that should happen but can’t because Congress is virtually owned by the banks. First, the guarantee should not apply if the risk intended to be protected is no longer present or has significantly changed. And second, with the guarantee gone, there is no reason to maintain the exemption by which student loans cannot be discharged in bankruptcy. Based on current law and cases, these are obvious conclusions that will be probably never happen. Instead, the banks will claim losses that are not their own, collect taxpayer guarantees or bailouts, and receive proceeds of insurance, credit default swaps and other credit enhancements.

Congratulations. We have created a world of finance in which it is more lucrative to lose money and get paid by the government, than to make money and contribute to the society for which these banks are allowed to exist ostensibly for the purpose of providing capital to a growing economy. So the economy is in the toilet and the government keeps paying the banks to slap us.

Did JPMorgan Pop The Student Loan Bubble?

Back in 2006, contrary to conventional wisdom, many financial professionals were well aware of the subprime bubble, and that the trajectory of home prices was unsustainable. However, because there was no way to know just when it would pop, few if any dared to bet against the herd (those who did, and did so early despite all odds, made greater than 100-1 returns). Fast forward to today, when the most comparable to subprime, cheap credit-induced bubble, is that of student loans (for extended literature on why the non-dischargeable student loan bubble will “create a generation of wage slavery” read this and much of the easily accessible literature on the topic elsewhere) which have now surpassed $1 trillion in notional. Yet oddly enough, just like in the case of the subprime bubble, so in the ongoing expansion of the credit bubble manifested in this case by student loans, we have an early warning that the party is almost over, coming from the most unexpected of sources: JPMorgan.

Recall that in October 2006, 5 months before New Century started the March 2007 collapsing dominoes that ultimately translated to the bursting of both the housing and credit bubbles several short months later, culminating with the failure of Bear, Lehman, AIG, The Reserve Fund, and the near end of capitalism ‘we know it’, it was JPMorgan who sounded a red alert, and proceeded to pull entirely out of the Subprime space. From Fortune, two weeks before the Lehman failure: “It was the second week of October 2006. William King, then J.P. Morgan’s chief of securitized products, was vacationing in Rwanda. One evening CEO Jamie Dimon tracked him down to fire a red alert. “Billy, I really want you to watch out for subprime!” Dimon’s voice crackled over King’s hotel phone. “We need to sell a lot of our positions. I’ve seen it before. This stuff could go up in smoke!” Dimon was right (as was Goldman, but that’s another story), while most of his competitors piled on into this latest ponzi scheme of epic greed, whose only resolution would be a wholesale taxpayer bailout. We all know how that chapter ended (or hasn’t – after all everyone is still demanding another $1 trillion from the Fed at least to get their S&P limit up fix, and then another, and another). And now, over 5 years later, history repeats itself: JPM is officially getting out of student loans. If history serves, what happens next will not be pretty.

American Banker brings us the full story:

U.S. Bancorp (USB) is pulling out of the private student loans market and JPMorgan Chase (JPM) is sharply reducing its lending, as banking regulators step up their scrutiny of the products.

JPMorgan Chase will limit student lending to existing customers starting in July, a bank spokesman told American Banker on Friday. The bank laid off 24 employees who make sales calls to colleges as part of its decision.

The official reason:

“The private student loan market is continuing to decline, so we decided to focus on Chase customers,” spokesman Thomas Kelly says.

Ah yes, focusing on customers, and providing liquidity no doubt, courtesy of Blythe Masters. Joking aside, what JPMorgan is explicitly telling us is that it can’t make money lending out to the one group of the population where demand for credit money is virtually infinite (after all 46% of America’s 16-24 year olds are out of a job: what else are they going to?), and furthermore, with debt being non-dischargable, this is about as safe a carry trade as any, even when faced with the prospect of bankruptcy. What JPM is implicitly saying, is that the party is over, and all private sector originators are hunkering down, in anticipation of the hammer falling. Or if they aren’t, they should be.

JPM is not alone:

Minneapolis-based U.S. Bank sent a letter to participating colleges and universities saying that it would no longer be accepting student loan applications as of March 29, a spokesman told American Banker on Friday.

“We are in fact exiting the private student lending business,” U.S. Bank spokesman Thomas Joyce said, adding that the bank’s business was too small to be worthwhile.

“The reasoning is we’re a very small player, less than 1.5% of market share,” Joyce adds. “It’s a very small business for the bank, and we’ve decided to make a strategic shift and move resources.”

Which, however, is not to say that there will be no source of student loans. On Friday alone we found out that in February the US government added another $11 billion in student debt to the Federal tally, a run-rate which is now well over $10 billion a month an accelerating: a rate of change which is almost as great as the increase in Apple market cap. So who will be left picking up the pieces? Why the Consumer Financial Protection Bureau, funded by none other than Ben Bernanke, and headed by the same Richard Cordray that Obama shoved into his spot over Republican protests, when taking advantage of a recessed Congress.

“What we are likely to see over the next few months is a lot of private education lenders rethinking the product, particularly if it appears that the CFPB is going to become more activist,” says Kevin Petrasic, a partner with law firm Paul Hastings.

“Historically there’s been a patchwork of regulation towards private student lenders,” he adds. “The CFPB allows for a more uniform and consistent approach and identification of the issues. It also provides a network, effectively a data-gathering base that is going to enable the agency to get all the stories that are out there.”

The CFPB recently began accepting student loan complaints on its website.

“I think there’s going to be a lot of emphasis and focus … in terms of what is deemed to be fair and what is over the line with collections and marketing,” Petrasic says, warning that “the challenge for the CFPB in this area is going to be trying to figure out how to set consumer protection standards without essentially eviscerating availability of the product.”

And with all private players stepping out very actively, it only leaves the government, with its extensive system of ‘checks and balances’, to hand out loans to America’s ever more destitute students, with the reckless abandon of a Wells Fargo NINJA-specialized loan officer in 2005. What will be hilarious in 2014, when taxpayers are fuming at the latest multi-trillion bailout, now that we know that $270 billion in student loans are at least 30 days delinquent which can only have one very sad ending, is that the government will have no evil banker scapegoats to blame loose lending standards on. And why would they: after all it is this administration’s sworn Keynesian duty to make every student a debt slave in perpetuity, but only after they buy a lifetime supply of iPads. Then again by 2014 we will have far greater problems (and for most in the administration, it will be “someone else’s problem”).

For now, our advice – just do what Jamie Dimon is doing: duck and hide for cover.

Oh, and if there is a cheap student loan synthetic short out there, which has the same upside potential as the ABX did in late 2006, please advise.



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“The debt load is so high, and the job outlook so bleak, that student loan default rates have almost doubled,” he wrote in a note to clients. “With the economy little improved since 2009 default rates are bound to rise further.”

“This number is greater than all credit card debt outstanding, and second only to mortgages in terms of total national debt.”

EDITOR’S NOTE: Once upon a time in a land we called America, people were prospering because nearly everyone had an opportunity to move up the economic ladder. Then, as human nature is want to do, some people with money controlling the world’s largest corporations decided they could have more money, more profit and higher share prices (wealth) if they simply stopped paying workers well. It wasn’t that these companies were in trouble. They just wanted more money. And being just people, like you and me, they didn’t stop to think about what the world would look like as a result of these short-sighted policies.

As wages went down profits went up for a short while. But of course people could not afford even modest price increases reflecting higher costs of materials. So the companies reduced quality to maintain their “profitability”.  So then we had lower wages and lower quality. But then normal increases in the cost of goods sold and ever-lowering wages took their toll on sales. People didn’t have the money to pay for the goods and services that were being produced.

There was only one thing to do, according to these geniuses, these titans of universe. By giving the worker money to spend, they would maintain sales and could even increase prices and maybe somewhere down the line they could even return to the quality that once adorned goods made in the USA. But there was a catch. If they gave the workers more wages, then THAT they would need to report as expenses which would lower reported profits and of course their wealth (share prices) would go down as the market is a reflection (long term) of ultimate profitability.

ENTER DEBT, STAGE RIGHT: Behold, here is money you can spend on our inferior goods and services that you can spend whenever and wherever you want on anything you want. The Gods call it debt. And debt will liberate you. Debt is a good thing because you can always buy that thing you wanted without saving up for it. So we will give you these plastic cards and you will have the money available to buy what you want.

And we, the money Gods, will also make your student loans from our private banks instead of the public funding. And we, the money Gods, will make hundreds of different types of loans to allow you a monthly payment in each case that you can afford so you can have anything you want — even if all the payments on all the loans are above your ability to pay. We can do that because we are going to give you more debt to pay the old debt.

BEHOLD! We, the money Gods, have created a class of assets that investors want to buy because it looks like they can earn a higher amount buying these assets than other assets they could buy with their investment money. And with student loans, you can’t lose because it is guaranteed by the U.S. Government. And if the U.S. Government doesn’t have the money to pay off these loans then we, the money Gods, will lend the Federal Government the money as long as they print enough money for us, so we can lend it to them. We will buy their bonds at 4% return while they print the money and give it to us at a cost of 0.01%. What a country!

So now we have lower wages, lower quality, and a mountain of debt that nobody can pay. Plus we have no jobs that could pay off student loans, which were made with investor money, just like all the other loans that were made with investor money. The money Gods, never at risk, made all the money that could be made and then tossed fictitious losses over the fence onto the taxpayers who had no money to pay for those losses. Exactly how the Banks could lose money when they never had any risk of loss is something that nobody has quite explained to me.

But as shown in the article below, the failure of the U.S. economy to provide jobs that provide sufficient wages to pay for the bills we have run up is now creating the inevitable result — nobody can pay for anything. And student debt is more onerous even than a mortgage. So the newbies that we always depend upon for “starter housing” are not there and they are not going to be there.

As goes housing, so goes the economy.

Surging student loan debt threatens homeownership

SEE ENTIRE ARTICLE ON housingwire.com

Monday, December 12th, 2011

College graduates may not be able get onto the property ladder as soon as they’d like due to the costs associated with funding higher education.

According to Rick Palacios, a senior research analyst at John Burns Real Estate Consulting, student loan debt now totals $865 billion, which is an average of $25,000 per student.

“Student loans are going to be yet another hurdle for the housing market to overcome,” Palacios said. “Faced with mounting student loan debt, poor job prospects and stagnant wages, an increasing number of people aged 25 to 34 have moved back in with their parents.”

According to John Burns, almost 6 million 25- to 34-year-olds now live with mom and dad. This number is up 26% from 2007.

The current rate of homeownership rate for this demographic stands at a 10-year low for under 30s. The rate for 30- to 34-year-olds is even worse, at its lowest rate in 17 years.

“The debt load is so high, and the job outlook so bleak, that student loan default rates have almost doubled,” he wrote in a note to clients. “With the economy little improved since 2009 default rates are bound to rise further.”

This number is greater than all credit card debt outstanding, and second only to mortgages in terms of total national debt.

“Even more troubling is the rise in debts associated with for-profit college and trade schools, whose revenues come primarily from debt available through federal government programs.,” said Palacios.

On Oct. 25, the Obama administration announced that it is taking steps to increase the affordability of higher education and aid those laden with outstanding student loan debt. In the short term, until the changes can take, current graduates will be relegated to the rental markets.

Their eventual introduction into the housing market will provide a boost, unless their credit profiles are degraded from lack of student loan repayments.

Write to Jacob Gaffney.

Follow him on Twitter @jacobgaffney.



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To help the cause, I am sending this email to you. This morning, I read one of your blog posts regarding student loan securitization. In it, you stated:

“If you borrowed money directly from the Government for a student loan then it is not likely, based upon the information I have, that the loan was securitized or sold into secondary markets. But the jury is on completely in on that.”

This prompted me to check my own student loans and I found the following:

– My loans originated with the federal government (DOE).
– In 2006, Deutsche Bank, acting through Academic Loan Group (now deceased, more or less), consolidated by federal student loans on the basis of an “Eligible Lender Trust Agreement”.
– Since 2006, Great Lakes has been my “servicer”.
– Phone calls to Academic Loan Group are answered “Nimbus 1 Financial”.
– Research this morning showed several similar “Eligible Lender Trust Agreement” SEC filings that ended with the student loan being ultimately transferred to a Trust 2006-X (or something like that)
– Putting it all together, it is a very similar (though the terminology is a bit different) to the mortgage scheme.
– I don’t know all the “Depositor” or final trust — yet — but it is clear that both exist and that Great Lakes/Academic Loan Group/Nimbus 1 Financial/X is the servicer under the student loan equivalent of the pooling and servicing agreement.

It looks like jury is leaning. I hope this helps others and spurs them to look into their student loan debt as well. The more fronts the big banks must fight, the weaker their position grows (Sun Tzu, paraphrased).

Spencer Brasfield, Esquire
423.967.8034 (t)
888.769.5650 (f)



COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary GET COMBO TITLE AND SECURITIZATION ANALYSIS – CLICK HERE


We forget that the securitization mess does not only include unperfected mortgage liens. It applies to ALL consumer loans of every kind. Very few transactions for private student loans, credit cards, auto loans, credit at furniture stores etc. are not covered by some claim for securitization. And just like the mortgage mess, the intermediaries are very quick to deny that there was any securitization which is, as usual, a blatant lie.

If you borrowed money directly from the Government for a student loan then it is not likely, based upon the information I have, that the loan was securitized or sold into secondary markets. But the jury is on completely in on that. This article is directed at those who went to a bank and got a student loan. The premise was that the Bank was of course taking a risk giving money to someone who probably had no income or insufficient income to prepay the loan. They were gambling on the earning power of a student who enters the marketplace armed with a degree. And contrary to recent articles I am extremely upset with those who suggest that getting a four year degree and advanced education (Masters, PhD, JD, etc.) is not worth the price.

The figures are simple. The unemployment rate in bad times like these, shows clearly that the rate is lower for those with such degrees by a large measure. College graduates have an unemployment rate of half of the national average. The reason is simple: by exposure to a liberal arts and science education, the student becomes aware of possibilities and opportunities, the student becomes more conversant at interviews and learns to write, speak and reason with greater proficiency than his non-degree counterpart. 

But students are emerging from educational institutions with a crushing burden of nearly one trillion dollars in debt, which has obvious negative consequences for the society. For one thing, they need to “go for the money” when they might otherwise choose something that would be more valuable to society, even if it is not directly counted or undervalued when GDP is computed for the country. Chiropractors and other “alternative medicine” practitioners are especially hard hit, coming out of school with six figures in debt and then all sorts of restrictions on their practice that prevent them from competing effectively with their allopathic counterparts.

And we have the same old argument: you borrowed the money, you are not paying, you must pay and so we are going to make you pay because this debt is not dischargeable in bankruptcy. This removes any real bargaining power by the borrower if he/she runs into trouble. The reason the debt is non-dischargeable is because there is a Federal guarantee. Obama, who had his own experience with student loans, along with his wife, Michelle, recognized that the use of private banks as intermediaries was only adding to the burden of  students. The rates were higher and they went even higher after graduation. So private banks are being take out of the equation for new loans. But the old ones continue to drag on our students and our society like a cancer. 

Enter securitization. It turns out that nearly all the Banks pursued a different route than the one set forth in the legislation that allowed private banks to intermediate these transactions. Instead of relying on the Federal guarantee, they sold the loans into the secondary market and there, the loans was subjected to the slicing and dicing that we have all heard about with mortgage loans. It was in the marketplace that the same type of credit default swaps, insurance, and other credit enhancements were used and the addition of co-obligors on the debt owed to the investors came into existence — without the knowledge or consent of the borrower. The identity of the borrower was taken and used as a means to earn a profit and fees that were non-disclosed and were implicitly not permitted by the statutory scheme by which the Banks were allowed to intermediate student loans in the first place.

With the Federal bailouts, payments under credit default swaps, insurance and the other credit enhancements, payments were received by or on behalf of the investor-lenders, whose money was advanced usually before the application for loan ever occurred. So we have a Bank merely getting a royalty for the use of its name and the use of its facilities to close the loan, but the loan never appears as a loan receivable on THEIR books. hence the guarantee, not meant for anyone but the Bank that was undertaking the risk of non-payment, was sold and securitized — not just the debt.

I would argue that the process by which the student loan was sold into the secondary market represents an election by the originating bank as to how they chose to handle the risk. They chose not to take any risk and instead to take a fee for originating loan whose risk exposure was eliminated and replaced with spreading that risk over thousands of people directly or indirectly and where the insurance, credit default swaps and credit enhancements absorbed that risk of non-payment. Therefore, the guarantee from the government never attached tot he loan and the loan, in my opinion, is fully dischargeable.

Now we have the additional problem that mirrors the mortgage market. Since the market was all messed up with improper paperwork in the mortgage market, we can safely assume that the banks were not any better when it came to the paperwork for student loans. If they were better on student loans than the question to ask is if they could do it right on $1 Trillion in student loans why didn’t they do it right on the mortgage loans? It certainly works against their argument that sheer volume as the reason why the paperwork is all messed up and it works against their argument that the creditor can be known by virtue of holding the note.

Since many of the pools were improperly formed and now don’t exist at all (most estimates put the figure at 50% — the number of pools that have been resolved or dissolved) and since the payments were made without subrogation by third parties, the investor-lenders are either already made whole or have been paid down. The loan receivable shown by the investor-lender doesn’t match up with the loan receivable claimed by “creditors” in the lawsuits and bankruptcies seeking recovery from the hapless student borrower who is trying to get some relief.

Therefore, like the mortgage cases, BOTH the amount of the loan, if there is any principal unpaid, and the existence of the creditor are in doubt. The Banks and servicers take the position that it doesn’t make any difference whether the creditor was paid or that payments were received on behalf of the creditor. What counts, they say, is whether the borrower made any payments. The investor-creditors would beg to differ. If they show a zero balance then the obligation is paid. If the payors did so under contracts win which the student was not in privity, then they fulfilled their contract with the investor-lenders. Whether they might have some unsecured, non-priority claim against the student borrower is another matter. But whatever it is, it certainly does not carry the federal guarantee and the non-dischargeable exemption with it, which was dropped long ago in the chain of securitization.


Student Loans Non-Dischargeable? — NOT SO FAST

If the government guarantee was waived in whole or in part, which I am sure is the case, then the rationale for non-dischargeability disappears. So I am suggesting that the assumption that the student loan is non-dischargeable should be challenged based upon the individual facts of your student loan. If it was securitized and it most likely was, then the party seeking to enforce the debt must prove that the government guarantee still applies. Otherwise it should be treated like any other unsecured debt.


Editor’s comment: Fact: Nearly all finance was securitized and still is. Ron Lieber talks below about efforts to change the law so student loans could be dischargeable in bankruptcy. Good idea. But I’m not so sure it is necessary to change the law.

The entire student loan structure, as President Obama has pointed out, is just plain wrong. Somehow loans that were provided by government anyway became guaranteed by government and then actually “funded” by banks. The banks could charge whatever interest they wanted, which frequently rose to usurious levels and if the student didn’t pay, then the government did, which is the way it was before they let private banks into the mix.

The effect was to burden students with loans that were impossible to pay off given the economic context of unemployment, underemployment and stagnant median income. So the prospective students frequently put off the education or avoided it entirely because the economics did not make sense. Those that did take the plunge are “underwater” just like U.S. Homeowners all because of financial chicanery.

To top things off they made student loans —- private student loans — non-dischargeable in bankruptcy. The theory was that since the government was doing students the favor of providing a guarantee of the loans, the loans would be more available, thus increasing liquidity in the student loan market. Since the net effect was a gusher of money pouring into private banks from the pockets of students, marketing efforts (including payoffs in student adviser facilities on campus) did in fact  lure students into these ridiculous arrangements.

Enter securitization: Since the private bank was guaranteed against loss, this provided the rationale for this lock-up system enslaving students before their careers even begin. But virtually ALL private banks were simply paid a fee for fronting the marketing of the loan which was funded with investor money because the loans were securitized before they were ever granted and thus the money and the risk was already resolved before the “underwriting” of the loan.

Like the mortgage loans, underwriting standards were dropped completely in favor of parameters set by Wall Street. The appearance of underwriting was preserved, but like mortgages, not very well. Like the mortgages, credit enhancements were added to the mix adding co-obligors right in the pooling and servicing agreements and assignments and assumption agreements, including insurance, credit default swaps etc.

Thus the “lender” that originating the Loan was what? A pretender lender whoa advanced no funds or capital of their own. Since the originating lender made the election of laying off the risk into slices and pieces and credit enhancements, they, in my opinion, waived the government guarantee.

If the government guarantee was waived in whole or in part, which I am sure is the case, then the rationale for non-dischargeability disappears. So I am suggesting that the assumption that the student loan is non-dischargeable should be challenged based upon the individual facts of your student loan. If it was securitized and it most likely was, then the party seeking to enforce the debt must prove that the government guarantee still applies. Otherwise it should be treated like any other unsecured debt.


June 4, 2010

Student Debt and a Push for Fairness


If you run up big credit card bills buying a new home theater system and can’t pay it off after a few years, bankruptcy judges can get rid of the debt. They may even erase loans from a casino.

But if you borrow money to get an education and can’t afford the loan payments after a few years of underemployment, that’s another matter entirely. It’s nearly impossible to get rid of the debt in bankruptcy court, even if it’s a private loan from for-profit lenders like Citibank or the student loan specialist Sallie Mae.

This part of the bankruptcy law is little known outside education circles, but ever since it went into effect in 2005, it’s inspired shock and often rage among young adults who got in over their heads. Today, they find themselves in the same category as people who can’t discharge child support payments or criminal fines.

Now, even Sallie Mae, tired of being a punching bag for consumer advocates and hoping to avoid changes that would hurt its business too severely, has agreed that the law needs alteration. Bills in the Senate and House of Representatives would make the rules for private loans less strict, now that Congress has finished the job of getting banks out of the business of originating federal student loans.

With this latest initiative, however, lawmakers face a question that’s less about banking than it is about social policy or political calculation. At a time when voters are furious at their neighbors for getting themselves into mortgage trouble, do legislators really want to change the bankruptcy laws so that even more people can walk away from their debts?

There are two main types of student loans. Under the proposed changes, borrowers would remain on the hook for federal loans, like Stafford and Perkins loans, as they have been for many years. To most people, this seems fair because the federal government (and ultimately taxpayers) stand behind these loans. There are also many payment plans and even forgiveness programs for some borrowers.

In 2005, however, Congress made the bankruptcy rules the same for the second kind of debt, private loans underwritten by profit-making banks. These have no government guarantees and come with fewer repayment options. Undergraduates can also borrow much more than they can with federal loans, making trouble more likely.

Destitute borrowers can still discharge student loan debt if they experience “undue hardship.” But that condition is nearly impossible to prove, absent a severe disability.

Meanwhile, the volume of private loans, which are most popular among students attending profit-making schools, has grown rapidly in the last two decades as students have tried to close the gap between the rising price of tuition and what they can afford. In the 2007-8 school year, the latest period for which good data is available, about one third of all recipients of bachelor’s degrees had used a private loan at some point before they graduated, according to College Board research.

Tightening credit caused total private loan volume to fall by about half to roughly $11 billion in the 2008-9 school year, according to the College Board. Tim Ranzetta, founder of Student Lending Analytics, figures it fell an additional 24 percent this last academic year, though his estimate doesn’t include some state-based nonprofit lenders.

There is no strong evidence that young adults would line up at bankruptcy court in the event of a change. That gives Democrats and university groups hope that Congress could succeed in making the laws less strict.

In Congressional hearings on the efforts to change the rule, last year and then in April, no lender was present to make the case for the status quo. Instead, it fell to lawyers and financiers who work for them. They made the following points.

BANKRUPTCIES WOULD RISE At the April hearing, John Hupalo, managing director for student loans at Samuel A. Ramirez and Company, made the most obvious case against any change. “With no assets to lose, an education in hand, why not discharge the loan without ever making a payment to the lender?” he said.

Once you set aside this questionable presumption of mendacity among the young, there are actually plenty of practical reasons why not. “People don’t like to go through bankruptcy,” said Representative Steve Cohen, Democrat of Tennessee, who introduced the House bill that would change the rules. “It’s not like going to get a milkshake.”

Andy Winchell, a bankruptcy lawyer in Summit, N.J., likens student loan debt to tattoos: They’re easy to get, people tend to get them when they’re young, and they’re awfully hard to get rid of.

And he would remind clients of a couple of things. First, you generally can’t make another bankruptcy filing and discharge more debt for many years. So if you, in essence, cry wolf with a filing to erase your student loans, you’ll be in a real bind if you then face crushing medical debt two years later.

Then there’s the damage to your credit report. While it doesn’t remain there forever, the blemish can have an enormous impact on young people trying to establish themselves with an employer or buy a home.

Finally, you’re going to have to persuade a lawyer to take your case. And if it seems that you’re simply shirking your obligations, many lawyers will kick you out of their offices. “It’s not easy to find a dishonest bankruptcy attorney who is going to risk their license to practice law on a case they don’t believe in,” Mr. Winchell said.

Sallie Mae can live with a change, so long as there’s a waiting period before anyone can try to discharge the debts. “Sallie Mae continues to support reform that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven-year period and still experience financial difficulty,” the company said in a prepared statement.

While there is no waiting period in either of the current bills, Mr. Cohen said he could live with one if that’s what it took to get a bill through Congress. “Philosophy and policy can get you on the Rachel Maddow show, but what you want to do is pass legislation and affect people’s lives,” he said, referring to the host of an MSNBC news program.

BANKS WOULDN’T LEND ANYMORE Private student loans are an unusual line of business, given that lenders hand over money to students who might not finish their studies and have uncertain earning prospects even if they do get a degree. “Borrowers are not creditworthy to begin with, almost by definition,” Mr. Hupalo said in an interview this week.

But banks that have stayed in the business (and others, like credit unions, that have entered recently) have made adjustments that will probably protect them far more than any alteration in the bankruptcy laws will hurt. For instance, it’s become much harder to get many private loans without a co-signer. That means lenders have two adults on the hook for repayment instead of just one.

BORROWING COSTS WOULD RISE They probably would rise a bit, at least at first as lenders assume the worst (especially if Congress applies any change to outstanding loans instead of limiting it to future ones). But this might not be such a bad thing.

Private loans exist because the cost of college is often so much higher than what undergraduates can borrow through federal loans, which have annual limits. Some lenders may be predatory and many borrowers are irresponsible, but this debate would be much less loud if tuition were not rising so quickly.

So if loans cost more and lenders underwrite fewer of them, people will have less money to spend on their education. Some fly-by-night profit-making schools might cease to exist, and all but the most popular private nonprofit universities might finally be forced to reckon with their costs and course offerings.

Prices might come down. And young adults just getting started in life might be less likely to face a nasty choice between decades of oppressive debt payments and visiting a bankruptcy judge before starting an entry-level job.

Ghost Towns: 25 million more suburban homes by 2030 than are needed.

Editor’s Note: Put simply this crisis will still be ongoing in 20 years. When you add the student loans that were securitized and which were “non-dischargable” in bankruptcy because of the government guarantee of the “risk” (which never existed because the risk was sold before the loan was ever funded, hence the guarantee should not flow with sale of loans into securitized pools and should therefore be capable of discharge), auto loans, credit card loans etc., it is not just a career to help people ensnared by the derivative trap it is generational.

More than that, this report shows, corroborates and confirms a central thesis to this blog: APPRAISAL FRAUD, KNOWINGLY IMPLEMENTED AT ALL LEVELS OF THE SECURITIZATION CHAIN FROM THE INVESTOR DOWN TO THE BORROWER.

Think about it. 30 million EXTRA homes. It didn’t come from population growth. It didn’t come from rising incomes and people expanding their families. Where did the demand for these houses come from? The conventional wisdom is that the demand came from the people who bought the houses, never mind that they left vacant property to move in and now have moved out leaving vacant property, leaving themselves with less wealth or more debt than they had before.

Look to the result to determine intent. It’s a basic proposition in law, psychology and criminology. Sure accidents happen but this was no accident — everyone can see that. The negative result here is that the investors got bilked out of trillions, the homeowners lost their homes, down payments, monthly payments (which were higher than rental) leaving them with no savings, higher debt, more owed on their credit cards, either no job or less of a job, rising expenses and less money at the end of each month.

And remember we are not talking about a few people who were living high on the hog because they were con artists. We are talking about 30 MILLION nuns, priests, police chiefs, cops, fireman, soldiers who served in our wars, and every day people who worked 9-5 scratching out a living. So the idea that 30 million people somehow connected into a mob and decided to wreck the financial system and their own lives is not very compelling or credible.

No, the all the positive results went to Wall Street. They got the money from the investors, the homeowners, the taxpayers and now the investors again as they “re-securitize” the old toxic crap. So the inescapable conclusion is that the demand came from Wall Street. It was Wall Street that needed new homes and developers who got higher and higher prices for unneeded homes. without the homes they could not sell mortgage backed derivative securities. Yes it IS that simple.

Wall Street needed the homes because they had this new financial toy they were taking out for a spin — but it couldn’t work without more homes at ever higher prices. Since they had amassed trillions of dollars and they were taking about 1/3 of it in their pockets off-shore, it was easy to spread around the gelt and get the securitization and mortgage origination players to pretend these were legitimate transactions when everyone other than the ivnestors and the homeowners knew the transactions were doomed.

It was Wall Street that created the demand and it was Wall Street that bet against the result, knowing that they had artificially pumped up the demand for housing, artificially inflated the value of the property, improperly inflated the appraisal from the rating agencies, and fraudulently sold securities, bought insurance, and abused the taxpayers with their influence in Washington.

NOW we have ghost towns on the rise — rising areas of crime, slums, drug manufacture, gangs and all that a dysfunctional society can offer. Like Harry Truman said, “How many times do you have to get hit in the head before you look to see who’s hitting you?”

It is Wall Street that should bear the brunt of the loss and Wall Street who should pay the taxes they owe on income they never reported and “protected” off-shore, it is Wall Street that owes billions in taxes, fees, fines and penalties to state and local government for the transactions they created involving property within the borders of each state and county.

Housing crisis turns some suburban neighborhoods into ghost towns

March 30, 2010 |  3:01 pm

There are hundreds of stories about how the housing crisis has affected people who have lost their homes — but what about the people left behind?  Eddie and Maria Lopez can tell you that the flight of families who have walked away or been foreclosed on has completely changed their small gated community in Hemet.

When they moved in, they were enticed by the ducks walking around the development, the lakes, the pool and clubhouse. Families held parties during the holidays; kids would play together on the street. But homes in the gated community of Willowalk plummeted in value — the Lopezes’ home went from $440,000  to $169,000 — and families began leaving in droves.

Now, the Lopezes say just about every house on their block is either empty or rented, and the behavior of some of the tenants makes the family feel uncomfortable. The house next door, for instance, is rented out to a handful of men, each of whom live in a separate room.

Some observers say that these suburban communities could become the new slums of America. As baby boomers age, they won’t need McMansions and will want to live closer to urban centers. And Generation X and Y already prefer walkable residences, according to Arthur C. Nelson, a University of Utah professor who projects there could be 25 million more of these suburban homes by 2030 than are needed.

For more on Willowalk and how cities across the state are coping with gated ghost towns, check out the story.

— Alana Semuels

From bucolic bliss to ‘gated ghetto’

Hemet’s Willowalk tract was family-friendly. Then the recession hit.

Willowalk's decline“We loved how everything was family-oriented,” said Willowalk resident Eddie Lopez, left, with wife Maria and six of their children. They bought their 5,000-square-foot house for $440,000 in 2006. It’s probably worth about $170,000 now. (Gina Ferazzi / Los Angeles Times / March 17, 2010)
By Alana SemuelsMarch 30, 2010

Reporting from Hemet – The gated community in Hemet doesn’t seem like the best place for Eddie and Maria Lopez to raise their family anymore.

Vandals knocked out the streetlight in front of the Lopezes’ five-bedroom home and then took advantage of the darkness to try to steal a van. Cars are parked four deep in the driveway next door, where a handful of men rent rooms. And up and down their block of handsome single-family homes are padlocked doors, orange “no trespassing signs” and broken front windows.

It wasn’t what the Lopezes pictured when they agreed to pay $440,000 for their 5,000-square-foot house in 2006.

The 427-home Willowalk tract, built by developer D.R. Horton, featured eight distinct “villages” within its block walls. Along with spacious homes, Willowalk boasted four lakes, a community pool and clubhouse. Fanciful street names such as Pink Savory Way and Bee Balm Road added to the bucolic image.

Young families seemed to occupy every house, throwing block parties and holiday get-togethers, and distributing a newsletter about the neighborhood, Eddie Lopez recalled.

“We loved how everything was family-oriented — all our kids would run around together,” said Lopez, a 41-year-old construction supervisor and father of seven. “Now everybody’s gone.”

Home foreclosures have devastated neighborhoods throughout the country, but the transformation from suburban paradise to blighted community has been especially stark in places like Willowalk — isolated developments on the far fringes of metropolitan areas that found ready buyers when home prices were soaring but then saw an exodus as values crashed.

Vacant homes are sprinkled throughout Willowalk, betrayed by foot-high grass. Others are rented, including some to families that use government Section 8 vouchers to live in homes with granite countertops and vaulted ceilings.

When the development opened in 2006, buyers were drawn to the area by advertising describing it as a “gated lakeshore community.” Now, many in Hemet call Willowalk the “gated ghetto,” said John Occhi, a local real estate agent.

There are dozens of places like Willowalk, and they are turning into America’s newest slums, says Christopher Leinberger, a visiting fellow at the Brookings Institution. With home values at a fraction of their peak, he said, it no longer makes sense to live so far from the commercial centers where jobs are concentrated.

“We built too much of the wrong product in the wrong locations,” Leinberger said.

Thanks to overbuilding, demographic changes and shifts in preferences, by 2030 there could be 25 million more suburban homes on large lots than are needed, said Arthur C. Nelson of the University of Utah. Nelson believes that as baby boomers age and as younger generations buy real estate, the population will abandon remote McMansions for smaller homes closer to shops, jobs and the other necessities of life.

Whatever their number, the presence of unwanted or abandoned homes stands to be a burden on local governments for years to come, as cash-strapped cities and counties have to spend precious resources to patrol the neighborhoods and clean unkempt yards and abandoned houses.

“There are cities saying to us, ‘I used to have eight code enforcement officers, and now I have one,’ ” said Bill Higgins, a staff attorney for the League of California Cities.

About 80 California municipalities are striking back, enforcing ordinances that fine lenders up to $1,000 a day for not maintaining properties that have been foreclosed, Higgins said. But most cities don’t have the resources to force absentee owners or renters to keep up their properties.

In Hemet, city officials have simply boarded up homes in some troubled neighborhoods. Plywood covers the windows of dozens of apartments on Valley View Drive; resident David Hall says it keeps prostitutes and drug dealers out.

Willowalk presents a different challenge. The development promised a Tiffany neighborhood for what was then something closer to a Target price.

“Leave the world behind as you unwind by our picturesque lakes,” cooed one advertisement, which touted “intimate botanical gardens and walking trails, tranquil lakes” and other attractions.

At first, the reality matched the come-ons.

Maria Lopez, a stay-at-home mother, recalls gazing at the mountains in the distance as her children played with groups of neighbors their own age. The community pool was just a few blocks away, and she says she used to let her older children, ages 13 and 14, go there by themselves.

Now she accompanies her children to the pool — though it has been closed of late — because the people who now hang out there “have no class,” she said, and she sits out front with her children if they play in the yard.

“My next-door neighbors — there are so many people living there, I don’t know who they are,” she said.

Walking through the development, there is not much evidence of the well-kept yards and friendly families Maria Lopez fondly recalls.

Many of the people answering a knock say they are renters, and won’t open their doors more than a crack to see who is on their doorstep. Red-and-white “for sale” signs dot the neighborhood, clashing with the golds and browns of the homes. The contrast between occupied and empty houses is evident on one block, where high grass in weedy clumps gives way to a neatly mowed lawn with handwritten signs pleading “Please do not let your dog poop on our yard.”

Homeowner Norma Hernandez, one of the few people outside on a recent sunny afternoon, can point out which families are permanent on her block.

“Rented, owned, rented, rented, rented,” she said, gesturing at the gargantuan houses across the street, one after another. “It’s bad,” she said, shaking her head.

Nacho Gomez is paid by absentee owners to look after their rental properties. Currently, he’s taking care of 17.

Doing a check of the homes on a recent Thursday, he left his van’s engine running as he inspected a shattered window in one property.

“A lot of them can’t pay the rent, and they leave the house a mess,” Gomez said, referring to tenants.

He has had to fix holes punched in walls and replace refrigerators, dishwashers and other appliances — even ovens — stolen by renters on their way out.

Those tenants appear to be the exception, and the renters provide at least one benefit: Without them, there would be even more vacant homes. Even so, their presence has fundamentally changed the character of what was once sold as an exclusive community.

The Willowalk Homeowners Assn. is trying to recapture some of the community’s lost spirit. In recent months, it launched a trash committee — members pick up rubbish in the park — and started a neighborhood watch group to keep an eye on residents’ homes.

But it wasn’t enough for Angelica Stewart and her family, who are leaving the $318,000 home they bought in 2006. To Stewart, living in a gated community is absurd when drug busts are a regular occurrence.

“It’s not worth it for us to live in this neighborhood,” she said.

The Lopez family plans to stick it out, knowing they can’t sell their house for anywhere near the $440,000 they paid for it. Based on comparable prices in the neighborhood, the place is probably worth about $170,000 now, and maybe less. They’re petitioning their bank for a loan modification.

Despite the financial loss and the fact that Eddie Lopez’s hours at work were cut because of the construction slowdown, the family holds out for a brighter future.

They’re hoping that Willowalk will someday become the idyllic neighborhood they once knew, nearly as perfect as advertisements had promised.

“When we moved in, everybody was homeowners, now everybody’s renting them out,” Eddie Lopez said. “But I have to stay. There’s nothing I can do.”

alana.semuels@latimes.com //

Wave of Voluntary Strategic Defaults Coming: 20% Under water

Editorial Comment: Actually the number is far higher. We compute it as around 45% when all is said and done. First of all there is consensus that property values are actually around 15% less than seller’s are asking. Second costs of selling the home makes up the rest, taking another 6-10% off the selling proceeds.

The break point where people go for “jingle mail” sending the keys back even if they are current is when that value is less than 75% of the principal due on the mortgage. In that sense, the 1/5 figure is right.

What has NOT been computed is what will happen if the growing trend toward strategic defaults (jingle mail) becomes a stampede. I think it will do just that — and further the trend will probably spread to other loans, especially those have been securitized like credit cards, auto loans, and student loans where the loan originator never advanced a penny toward the loan and just collected a large fee.

Investors and borrowers need to get together and work out the details, throwing the loss onto the “banksters” (Pecora term from 1930’s). Disinformation is being spread and believed. The creditors and the debtors are being intentionally blocked from knowing their relationship to each other. When they DO know, the ship will turn back over and start floating again — at the cost of those who perpetrated the largest fraud in human history.

There IS a way to work this out but not if the goal is to save the banks that created this mess. We have at least 7,000 other banks, TARP and other bailout money available, and an IT infrastructure that can be used today to provide the full range of services and conveniences that the “too big to fail” banks use to beat down the competition from community banks and credit unions.

Associations of community banks not controlled by large regional banks can play a pivotal role in this. Where the associations are controlled by the big banks like Florida bankers Association, the community bankers need to re-start their own association.


One-Fifth of U.S. Homeowners Owe More Than Properties Are Worth

By Daniel Taub

Feb. 10 (Bloomberg) — More than a fifth of U.S. homeowners owed more than their properties were worth in the fourth quarter as the number of houses and condominiums lost to foreclosure climbed to a record, according to Zillow.com.

In the fourth quarter, 21.4 percent of owners of mortgaged homes were underwater, up from 21 percent in the previous three months and down from 23 percent in the second quarter, the Seattle-based real estate data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in December, the highest rate in Zillow data dating back to 2000.

Underwater homes are more likely lost to foreclosure because their owners have a harder time refinancing or selling when they get behind on loan payments. U.S. home values dropped 5 percent in the fourth quarter from a year earlier, the 12th straight quarter of year-over-year declines, Zillow said.

“While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year,” Zillow Chief Economist Stan Humphries said in a statement. “Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time.”

There were 2.82 million foreclosures in the U.S. last year, according to RealtyTrac Inc., the most since the data provider began compiling figures in 2005. The number may rise to 3 million in 2010, the Irvine, California-based company said last month.

Bank sales of foreclosed properties accounted for a fifth of all U.S. home sales in December, Zillow said. Such transactions made up 68 percent of sales in Merced, California; 64 percent in the Las Vegas area; and 62 percent in Modesto, California, the company said.

Almost 29 percent of homes sold in the U.S. went for less than their sellers originally paid for them, Zillow said.

The closely held company uses data from public records going back to 1996. Its mortgage figures come from information filed with individual counties.

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net.

Last Updated: February 10, 2010 00:01 EST

Common Sense Revisited: Securitization and student Loans and Other Matters

Common Sense Revisited: The current crises in reform of student loans, health-care, financial services, prisons, pharmaceuticals, and dozens of other things stalled on the table by an artificial definition of “majority” as 60% instead of 51% lies at the heart of our problem. It isn’t that one policy is right or another is wrong. The problem is that there is no real debate, vote or action.

Here is a simple proposition: A government policy intending to deliver a direct benefit to taxpayer/citizens MUST be delivered by a government agency. All other activities performed by the private sector must be subject to oversight and some regulation so there is a referee on the playing field.

Common sense proves the point with relentless precision. Suppose we violated this simple premise again by “privatizing” fire or police services. Privatizing a social service is exactly the same as delivering a choice to an intermediary as to whether to deliver the service or put the money in their own pocket. The outcome is obvious.

Whether it is student loans (see below),health-care, financial services, prisons, pharmaceuticals or anything else the effect of delegating government or social function to private interests can ONLY lead to one result — reduction of services, increased costs, and increased profits to intermediaries who add nothing to the process.




  1. For those who are academics a quick review of the economists Von Mises and Rothbard you will see that for decades there has been a whole school of economists who have equated economics with politics and politics in turn being the tool of economists.  With respect to the student loan program, the proposal back when this program started was based on the following suppositions:
  1. The use of private infrastructure would result in a more efficient system.
  2. The use of private sector banks would result in proper underwriting of loans since the banks presumably know how to make and underwrite a loan.
  3. The use of taxpayer money to guaranty against default diminished the risk to “quote nearly zero” thus encouraging banks to become involved in the student loan program.
  4. The use of taxpayer money in fees and grants to the private intermediary banks who were inserted into the process would further “encourage” student lending.
  5. The legislative imperative in the bankruptcy law preventing students from discharging their obligations under private student loans would further diminish the risk to private banking lenders and encourage them to participate in the student loan program.
  6. The conclusion was that everyone makes money, we get more college graduates, a booming economy results from a highly informed labor force, job growth would inevitably result, along with higher wages, more consumers with more money to spend, greater innovation from well rounded college students, more students getting advanced degrees and the ultimate result of the United States continuing as the No. 1 country in everything everywhere.

The assumption that using private infrastructure is more efficient is simply an ideological myth.  A quick look at the privatization of prisons clearly shows that privatizing infrastructure results in higher costs, more laws, more government, and the creation of a private sector accruing profits that would otherwise be translated into lower taxes for the citizens.

The use of private sector banks inserted into the process of student lending on the premise that they know how to make a loan is similarly a myth when you add the other features of the student loan program.  Through securitization like in the securitization of private home loans, the banks were inserted into a process where the initial premise was that they might have a risk.  In fact thorough securitization and the other features of the student loan program, the originating lender had no risk at all.  Thus the other features of the program should not have applied and, I would argue, do not apply if challenged properly in bankruptcy court or in state or civil court proceedings.

In fact these banks were not making the loans, they were simply passing on money from sources outside the transaction who were not identified or disclosed to the student at the time of the loan.  Like the home mortgages, students were lured into what appeared to be low payments only to find that their payments later skyrocketed along with interest rates that sometimes reached 16 percent or 18 percent per year.

Thus in a securitized student loan, just as in a securitized home loan, there never was a risk assumed by the mortgage originator nor any of the other intermediaries (including the investment banker who originated the securitization chain) and the guaranty from the federal government and protections against discharge in bankruptcy were waived at the time of the organization of the transaction because the risk presumed to exist on the part of the lender never existed.

The use of taxpayer money to “encourage” student lending merely amounts to another government program creating a giant at the taxpayer troth where they made a fortune in fees without risk.  The numbers just don’t add up.

The ultimate conclusion that the results would benefit society and the students has been disproven.  While there were many people in the private sector who made a great deal of money from the unwitting students who entered into these private student loans and from the government who paid the private sector banks to enter into these transactions, the rest of the benefits for the most part never materialized.  In fact, the numbers don’t add up today.  Getting a college degree on private student loans leaves the students in a state of virtual permanent economic slavery under a debt which will never be repaid.

February 5, 2010

Industry Lobbying Imperils Overhaul of Student Loans

WASHINGTON — Four months ago, it appeared all but certain that the White House and Democrats in Congress would succeed in overhauling the student loan business and ending government subsidies to private lenders.

President Obama called the idea a “no-brainer” last fall, predicting it would take billions of dollars from the profits of private lenders and give it directly to students, and many colleges were already moving to get loans directly from the federal government in anticipation of the next move by Congress.

But an aggressive lobbying campaign by the nation’s biggest student lenders has now put one of the White House’s signature plans in peril, with lenders using sit-downs with lawmakers, town-hall-style meetings and petition drives to plead their case and stay in business.

House and Senate aides say that the administration’s plan faces a far tougher fight than it did last fall, when the House passed its version. The fierce attacks from the lending industry, the Massachusetts election that cost the Democrats their filibuster-proof majority in the Senate and the fight over a health care bill have all damaged the chances for the student loan measure, said the aides, who spoke on the condition of anonymity because they were not authorized to discuss the matter publicly.

But they said the administration had recognized the threat and was beginning to push back in an effort to get the plan approved.

Sallie Mae, a publicly traded company that is the nation’s biggest student lender with $22 billion in loans originated last year, led the field in spending $8 million on lobbying in 2009, more than double the year before, and other lenders spent millions of dollars more, according to an analysis prepared for The New York Times by the Center for Responsive Politics.

Political action committees for the lenders and company employees made $2.1 million in political contributions last year, with the money split evenly among Democrat and Republican candidates, the data showed. Sallie Mae’s PAC alone made $194,000 in donations.

Some 10 million students got loans last year to help pay for their educations, and there is disagreement about whether having the federal government take over virtually the entire lending program would help or hurt them. Private lenders warn that students may default on their loans more often because they will get less counseling; the Obama administration says students will benefit from more grants and expanded educational programs.

A defeat for the White House at the hands of the industry could become further evidence of the administration’s sagging political fortunes. The unexpected loss of the Massachusetts Senate seat has given opponents of the lending plan an opportunity that seemed unlikely last September, when the House approved legislation to move to a federally-sponsored loan program.

The student loan industry, which would be forced out of the loan origination business if the proposal became law, is seeking to cast the administration’s plan as an ill-conceived government takeover that could put thousands of people out of work at private lending centers around the country at a time when unemployment is hovering around 10 percent.

“We anticipated this,” Arne Duncan, the education secretary, said of the lending industry’s lobbying efforts. “They’ve had a sweet deal. They’ve had this phenomenal deal that taxpayers have subsidized, and that’s a hard thing to give up.”

Private lenders get a cut of the federally backed loans that they originate and service, with little risk of their own. At Sallie Mae, lobbyists for the firm are focusing on senators regarded as fiscal conservatives, as well as those in states that are home to lending centers with jobs at stake, including Florida, Illinois, Nebraska, New York and Pennsylvania, said John F. Remondi, chief financial officer for the company.

Student loan lenders employ about 35,000 people around the country, although estimates differ as to how many jobs would be eliminated if the federal government took over all direct lending on student loans.

“We haven’t left any stone unturned — we’ll meet with anyone who will meet us,” Mr. Remondi said in an interview. “We’re trying to identify at least 12 senators who would be helpful in this process.”

At the same time, Sallie Mae and other lenders have staged a series of town-hall-style meetings at their job centers around the country to help mobilize opposition to the White House plan and collect thousands of signatures for a petition drive in support of their own plan.

“I would think that the White House would prefer not to make senators vote for something that is going to be very unpopular in their states — and for good reason,” said Jamie Gorelick, a former Clinton administration official who is now lobbying for the lending industry.

Mr. Obama defended his plan last week in his State of the Union address.

“To make college more affordable, this bill will finally end the unwarranted taxpayer subsidies that go to banks for student loans” and use the savings to finance other educational programs, he said to cheers from Democrats. “In the United States of America,” Mr. Obama said, “no one should go broke because they chose to go to college.”

The money that would be saved by cutting out the private-industry middlemen — about $80 billion over the next decade, according to a Congressional Budget Office analysis — could instead go toward expanding direct Pell Grants to students, establishing $10,000 tax credits for families with loans, and forgiving debts eventually for students who go into public service, administration officials say.

The bill would also shift tens of billions of dollars in expected savings to early learning programs, community colleges and the modernization of public school facilities.

Representative George Miller, the California Democrat who has led the fight for the lending overhaul as chairman of the House Education Committee, predicted in an interview that the plan would ultimately pass.

“If people want to lose $80 billion on the taxpayer’s dime for the very narrow interests of Sallie Mae, I guess they can decide that, but it makes no economic sense to me,” he said. “They had a great ride for years.”

If Congress backs Mr. Obama’s proposal, opponents say that students will forfeit the individualized service that private lenders are better able to offer: a one-on-one meeting in a high school gym, a range of loan options to pick from, or an 11th-hour meeting to avoid a default. The lenders have offered an alternative proposal to retain a more active role in originating loans, which they say would generate significant federal savings — $67 billion in the next decade, according to the Congressional Budget Office.

Some financial-aid administrators at colleges around the country say they are worried that the political uncertainty over the loan proposal and the one-size-fits-all approach of the White House’s approach could hurt colleges and students.

“We’re caught in a political struggle,” Caesar Storlazzi, the chief financial aid officer at Yale, said in an interview. Like a wave of other colleges in recent months, Yale decided in November to switch from private-sector loans to the federal government’s direct-lending program.

But with passage of the White House plan now appearing “less inevitable,” Mr. Storlazzi wonders whether keeping the private lenders in business is better for students.

“It really felt like the administration was just shoving this down our throats,” he said. “It feels a bit like a federal takeover.” With competition among lenders, he said, “We get better prices and services.”

Citigroup et al Bailouts Present Additional Defenses Againsts Collection of Virtually Any Debt

Think about it. You are a taxpayer and your tax dollars are absorbing the “losses” associated with write-offs of your debts (mortgage, credit card, auto-loan, student loan etc.) whether you pay or not! The reason for the toxicity of those assets the government is eating up is NOT because of defaults, it is because the paper is bad to begin with. In plain words, those debts are not enforceable because the securitizers and investment bankers didn’t follow the rules and intentionally defrauded both the investors who put up the money and the “borrowers” who were in actuality the unwitting parties to a scheme to issue unregulated securities under false pretenses. Unless the “bailout” goes to the actual victims of the fraud instead of the perpetrators, how are we ever going to show our faces in the world financial markets again?

The Rescue of Citigroup


Too big to fail and increasingly desperate as investors fled its shares, Citigroup last night agreed to be rescued by the troika of agencies that have been gathering the U.S. financial system under a government umbrella in these desolate times.

The Federal Reserve, U.S. Treasury and Federal Deposit Insurance Corporation late last night unveiled the rescue of the banking giant, a “package of guarantees, liquidity access, and capital” aimed at stabilizing financial markets and reviving the faltering economy.

In part the package marks a return to Treasury’s focus on the troubled, mostly mortgage-backed securities that have encumbered Citi’s balance sheet and those of other banks and that were the original target of Washington’s $700 billion bailout measure. Citi will have to absorb the first $29 billion in losses on what the bank and agencies calculated to be a $306 billion portfolio, and taxpayers would be responsible for losses after that. In exchange, Treasury and the FDIC will get $7 billion in new preferred Citi shares that come with a dividend of 8%.

Treasury will also give $20 billion to Citi for additional preferred shares, and in turn attain authority over how the bank compensates its executives and Citi’s compliance with an FDIC program to help homeowners with troubled mortgages. This would come on top of the $25 billion in funds Citi received when it and other banks accepted government help this fall. Last night’s announcement, though later than planned due to hitches in the negotiations, was the latest aimed at preceding global markets’ weekly open. And though it concerned just one company, the ramifications of Citi’s travails would seem to make the deal mark another milestone in this season of bailouts. “If the government’s rescue plan is a success, it could help bring stability to the entire financial system,” The Wall Street Journal says. “If it doesn’t, even deeper doubts about the industry’s future could spread.”