Home > 2013 > Mortgages

Why Student Loans & Mortgages Are Still Our Biggest Problems

Advertiser Disclosure Comments 0 Comments

The other day, JPMorgan—the nation’s biggest bank by asset value—announced that it was getting out of the student loan business. For good. And it’s not alone: U.S. Bancorp made the same decision a little more than a year ago.

Education lending today isn’t as much fun as it used to be. Not when roughly a third of the loans that are in repayment mode are 90 or more days past due, the feds are leaning on lenders to deal with that problem, the regulators are tightening the screws on their processes, and the bankruptcy laws—which have to this point protected the lenders from losses—are now on the verge of change.

Even the loan-servicing component of the business is under pressure. For example, the Sallie Mae Corporation (SLM) is reportedly being investigated by the Department of Education because it hasn’t been funneling enough financially distressed borrowers into various government relief programs.

SLM isn’t just the country’s largest student loan company; it’s a securitization factory. The company’s monetary magicians render billions of dollars of the Federal Family Education Loan (FFEL) program loans they own into bite-size pieces the global investment community is more than happy to consume. Why? Because the loans are backed by the government.

But these investors are a stubborn bunch. They paid big bucks for FFEL-collateralized securities, which have been engineered to deliver a specific rate of return. So extending repayment terms or worse—reducing interest rates and/or forgiving principal balances—will negatively affect the ROR they’ve bargained for (and probably trigger a lawsuit or two, as well). That’s why the subcontracted loan-servicing companies promote temporary fixes, such as forbearances and deferments, instead of longer-term solutions. Meanwhile, cash-strapped borrowers continue to suffer.

Same Old Same Old

Given this torturous experience with the government-backed FFEL program, you’d think the folks in D.C. would have learned from their mistakes.

Think again.

Just before the Labor Day recess, both the executive and legislative branches were sounding pretty upbeat about reforming the nation’s mortgage-finance system. The idea they have in mind is to replace the Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corporation (Freddie Mac) — the now-government-controlled financial backstops for the nation’s residential mortgage origination — with a private-market solution.

Housing prices have begun to rebound, and the inventory of unsold properties is diminishing. So for the feds to pivot from the role of “lender of last resort” (actually, the only lender of record, in the past several years) makes sense.

The thing is, though, the scheme that our representatives have in mind is worryingly familiar: they plan to lure investors back into the game with government guaranties.

There’s no doubt it will work. It sure did for the FFEL program, and it’s still working today: Sallie Mae is purchasing all the government-backed loans it can find from lenders that are exiting the business.

But what about after the newly government-guaranteed mortgages are securitized, which is all but certain to occur? What can consumers who’ve hit a financial bump in the road expect when they ask for relief in the form of a loan restructure or modification? Probably the same runarounds and heartaches that student-loan borrowers are experiencing today, especially since an increasing number of banks are selling off their mortgage loan-servicing rights to other companies.

Worse, the special interests have been busy lobbying for even weaker regulations governing the mortgage lending process. In fact, some are calling for the elimination of all underwriting standards from the prospective legislation so as not to deter private market participation. In other words, things such as down-payment requirements, minimum debt-to-income levels and even credit scores would not be linked to the financings that are ultimately to be guaranteed by taxpayers like you and me.

I don’t know about you, but I can’t figure out how the direction in which we seem to be headed is all that different from the miserable path we’ve taken before.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

Image: Digital Vision

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team