A Student Of The Debtor Economy

Over the last several years I've detailed the fight with America's mortgage giants and how they wrecked America, and one of the big issues they hit us all with was "robosigning", the practice of using MERS, the federal bank mortgage record system, as a dumping ground for broken securities and mortgages so tied up in lost records and smoke and mirrors that nobody knows who really owns the mortgage on millions of homes. 

It's still a major issue, and now we're finding out that this practice -- securitizing loans and then chopping up the debt for sale as the Next Great Investment Vehicle -- is rampant in the student loan industry as well.

Student loans have eclipsed credit cards to become the second-largest source of outstanding debt in the U.S., after mortgages. Since 2007 the federal student loan balance has more than doubled, to almost $1.2 trillion from $516 billion. The Consumer Financial Protection Bureau estimates that students, former students, and their parents owe an additional $150 billion in loans from banks and other private lenders.

With defaults climbing, lenders have turned to the courts to collect. Many of their suits are marred by missing documents and procedural errors, say consumer advocates and lawyers defending debtors. “Our office is seeing an uptick in abusive loan debt-collection tactics that leave no room for relief,” wrote Massachusetts Attorney General Maura Healey in an e-mail.

The paperwork problems echo the “robosigning” scandals that followed the housing bust. Like mortgages, student loans were bundled into packages and sold to investors. “This is robosigning 2.0 with student loans,” says Robyn Smith, a lawyer with the National Consumer Law Center, a nonprofit advocacy group. “You have securitized loans in these large pools; you have the sloppy record keeping,” as in the mortgage crisis.

The banks learned nothing.  Well, I take that back: they learned they can get away with this because Congress won't punish them.  And just like in 2008-2011, collections agencies are relying on shock and awe tactics to scare people in paying up more than they owe. And when they can't prove they own the mortgage to collect on, judges are siding with the American people.

The National Collegiate Student Loan Trusts are investment vehicles created by a Boston company called First Marblehead that concentrates on education lending. From 1996 through 2007, First Marblehead bought student loans from lenders including Bank of America, JPMorgan, and a bank now owned by Citizens Bank. It transferred batches of loans to trusts it created—more than two dozen in all. The trusts sold bonds backed by the loans. The trusts are responsible for collecting loan payments from borrowers and paying out interest to bondholders. In 2013 bond rater Moody’s Investors Service said it expected losses to reach as high as 50 percent in 15 National Collegiate trusts it examined.

National Collegiate trusts have been among the most active in suing borrowers, consumer advocates say. Since 2011, National Collegiate has filed more than 1,900 civil cases in Missouri, or an average of more than one lawsuit a day. The company has filed a total of more than 2,100 suits in Connecticut, Indiana, Arizona, and Oklahoma, according to state legal databases. Representatives for National Collegiate didn’t respond to repeated requests for comment. “We don’t comment on the trusts,” First Marblehead Chief Financial Officer Alan Breitman says.

Student debtors are challenging National Collegiate in court, and judges in Ohio, Florida, and Kentucky have found that the trusts haven’t proved they own the debt. In California, 13 people are seeking class-action status for a suit against National Collegiate for suing them to collect on student loans without identifying the original lender—which violates California debt-collection law. National Collegiate has denied the allegations in court filings.

This is the next big crisis in the economy, and it's going to be a brutal mess to work through.  Don't expect the economy to get too much better than it is now until this problem goes away.