STUDENT LOANS: CREDITOR MISSING IN ACTION

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STUDENT LOAN BORROWERS IN SAME SHOES AS MORTGAGE BORROWERS

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.

Tags: bankruptcy, borrower, countrywide, disclosure, foreclosure offense, fraud, LOAN MODIFICATION, modification, rescission, securitization, student loans, trustee, WEISBAND
Posted in bubble, Corruption, Eviction, securities fraud |