This New Bubble Is Even Bigger Than The Subprime Fiasco

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond.

The idea was revolutionary.

The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors.

The idea caught on, and pretty soon, everyone was doing it.

As Bethany McLean and Joe Nocera describe in their excellent history of the financial crisis (All the Devils are Here), the first subprime bubble hit in the 1990s.

Early subprime lenders like First Alliance Mortgage Company (FAMCO) had spent years making aggressive loans to people with bad credit, and eventually the consequences caught up with them.

FAMCO declared bankruptcy in 2000, and many of its competitors went bust as well.

Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist.

But it didn’t take very long for the madness to start again.

By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned.

Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny.

It was madness.

By 2007, the total value of these subprime loans hit a whopping $1.3 trillion. Remember that number.

And of course, we know what happened the next year: the entire financial system came crashing down.

Duh. It turned out that making $1.3 trillion worth of idiotic loans wasn’t such a good idea.

By 2009, 50% of those subprime mortgages were “underwater”, meaning that borrowers owed more money on the mortgage than the home was worth.

In fact, delinquency rates for ALL mortgages across the country peaked at 11.5% in 2010, which only extended the crisis.

But hey, at least that’s never going to happen again.

Except… I was looking at some data the other day in a slightly different market: student loans.

Over the last decade or so, there’s been an absolute explosion in student loans, growing from $260 billion in 2004 to $1.31 trillion last year.

So, the total value of student loans in America today is LARGER than the total value of subprime loans at the peak of the financial bubble.

And just like the subprime mortgages, many student loans are in default.

According to the Fed’s most recent Household Debt and Credit Report, the student loan default rate is 11.2%, almost the same as the peak mortgage default rate in 2010.

This is particularly interesting because student loans essentially have no collateral.

Lenders make loans to students… but it’s not like the students have to pony up their iPhones as security.

That’s what made the subprime debacle so dangerous.

Millions of homes were underwater, so when borrowers didn’t pay, lenders didn’t have sufficient collateral to cover their loan exposure.

With student loans, there is no collateral. Lenders have no security to recoup their loans.

So when students don’t pay, someone is going to take a hit.

That ‘someone’ will likely be you.

That’s because hundreds of billions of dollars of these student loans are either owned or guaranteed by the United States government.

So as borrowers stop making payments, it’s the taxpayer who will suffer yet another massive loss.

Let’s be honest, though, there’s something seriously screwed up with this system.

Young people are pushed into this system by a society that places an irrationally high value on university degrees.

Kids are told for their entire lives that if they study hard to get into a good school, there will be a great career waiting for them.

For many young people this turned out to be a total lie.

In fact, Federal Reserve data once again show that, for at least 25% of college graduates, salaries are no higher than for people with just a high school diploma.

Racking up so much debt hardly seems worth it.

It seems bizarre to begin with that an 18-year old will know what s/he wants to do in life, to the point that they should take on $50,000 in debt for a piece of paper that might not even make them marketable.

What did any of us really know at age 18? And how many of us could have accurately predicted our life’s path?

Very few.

And yet there’s an absurd amount of pressure to force young people into this system that heaps debt upon them.

If you’re a young person about to go down this path of debt, I’d suggest two alternatives:

1) Look overseas.

There’s a multitude of top-ranked universities around the world that you can attend for a fraction of what you might pay at home. See here, and here.

2) Seek mentorship.

The master-apprentice relationship worked well for thousands of years. And it’s so simple.

If you want to be successful, learn from successful people.

If you want to be great at something, find someone who’s already great at it and learn from them.

And if you’re not sure, find someone who you respect admire… someone whose activities and values excite you… and make yourself indispensable to that person

Do you have a Plan B?

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Bigly's picture

What is your point? There are lots of these black swans....

ejmoosa's picture

No one is going to be able to unload a worthless education.  The only question is who will be on the hook for the funds wasted.

 

My guess is the taxpayer.

knukles's picture

It's NOT a Bubble
It's an Investment on Our Future for Our Chillen's yo

cheka's picture

loan forgiveness for the 'students'.  taxpayers will get stuck with it (again)

obomba already did this with two large for-profit skoolz (heavy minority demographics).  their 'loans' turned into gifts

ipso_facto's picture

'loan forgiveness for the 'students'. '  How many of these 'students' can read at a 10th grade level?

tc06rtw's picture

   
 “Simple Simon”  doesn’t understand…  the reason you go to college is to become  Steve Jobs  or  Mark Zuckerberg  or  Marissa Mayer  or  Elizabeth Holmes.
   

cue in cue's picture
cue in cue (not verified) tc06rtw Mar 22, 2017 8:13 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

Decay is Constant's picture

If it sounds too good to be true, it probably is. Will probably cost me more than a college education in the long run.

Mano-A-Mano's picture
Mano-A-Mano (not verified) Decay is Constant Mar 22, 2017 9:20 PM

BUBBLE after BUBBLE is karma for the greatest injustice of the 20th century.

http://biblicisminstitute.wordpress.com/2014/07/15/the-greatest-injustic...

lexxus's picture
lexxus (not verified) Mano-A-Mano Mar 22, 2017 9:20 PM

Things always come back to BITE you in the ass.

The Shadow Broker's picture

I really wish ZH had a way to report spammer pieces of shit like yourself. 

Heavy's picture

Probably ought to bring back bankruptcy and make loan originators responsible for the loans they write otherwise they write too many shitty loans and the shitty captured government bails them out.

LauraB's picture

This is exactly why student loans are (and should be) non-dischargeable in bankruptcy - there is no collateral that the bank can sell to recoup the losses from defaults.  If the government/taxpayers weren't guaranteeing student loans, the banks wouldn't be making so many of them and college educations would still be worth something.

Davy Crockett's picture

This is exactly why student loans are (and should be) non-dischargeable in bankruptcy

Wrong!  Having student loans be non-dischargeable make them zero-risk loans for the banks, which means they shovel any amount of money to any student with a pulse, which floods money into the educational system, causing price inflation.

This culminates in prices that have become so inflated, that it is now impossible to finance college by any other means except getting a loan to pay these artificically inflated prices, and results in a nation of debt slaves, who will work their entire lives to pay off the inflated cost of college.

And the price inflation has not stopped.  As long as the loans remain non-dischargeable, the banks will continue to flood money into the system, driving prices higher and higher till it finally reaches the point that the student actually dies or retires before paying off the loan.  At that time, prices may stabiliize, and the entire nation will be enslaved.

24Richie's picture

8% of outstanding student loan debt is owed to banks. The rest is owed to Treasury.

 

Prisoners_dilemna's picture

Interesting assertion.

Will you provide a link to back up your statement?

I'm not agreeing or disagreeing, just have a healthy skepticism and desire to see the data, to arrive at the truth of the matter.

I heard something like the Treasury backs students loans which is different from the Treasury issues/makes loans.

Then there are government lenders??? ummm Pell?? no thats a grant program IIRC...

I would love some clarification. Interesting comment.

 

Crocketts logic may apply to non-bank lenders.

The Shadow Broker's picture

The system is coming down whether you like it or not.  Seperate your income from your location and move somewhere where you don't have to pay taxes.

curbjob's picture

Everyone who earned a degree from Trump University paid for it in American Eagles ...

Smart bunch that lot.

Sound money.

 

GUS100CORRINA's picture

Sorry to say, ELVIS has left the building!!

Let's look at the US Government at 20 Trillion in debt and 100 Trillion + in unfunded liabilities.

GIVE ME A BREAK WITH THE SHIT IN THIS ARTICLE.

Mr Pink's picture

Isn't the author missing one major detail? There were zillions in derivatives on those sub prime loans.

Has any placed bets on student loans?

Prisoners_dilemna's picture

Here we were all hating on someting together and you had to go ruin it with the nuclear comment.   We want gloom and doom but not THAT much g&d!

:p

Excellent point.

Kyle Bass is still talking nickels??  I bet he's lining himself up to make a killing off this bubble.

Armadillo Bandit's picture

For some reason ZeroHedge likes to reiterate certain key points. Who would have thought that a news site would try to inform new readers? Almost as if a business wants to grow its user-base. Who would have thought?

rockstone's picture

A genuine black swan is a quirk of nature. This puppy was man made.

halcyon's picture

Total BS article.

1. student loans are not synthesized five times over into an interlinked derivatives chain

2. The collater is not rehypocated in a chain four times

3. Banks are better capitalised and have less leverage, they can write down more

4. You can keep on squeezing adult educated slaves, you cant squeeze the homeless

Student debt bubble is amongst the least of our worries.

Too small, too visible and too easily dealth with.

 

indio007's picture

All unsecured loans.

HRClinton's picture

No student loan can be expunged or forgiven through personal bankruptcy. 

Wall St. is happy. Their business models remain intact. 

madmike117's picture

The only problem with what you're trying to scare us with is that with the sub prime crisis, all of that debt was privately held. With the 'crisis' you are scaremongering about, all of the debt is held by the Feds. Secondly, is there untold trillions in credit default swaps and so forth? Are there 'Student loan backed securities'?

JuliaS's picture

Student Loan Backed Securities are called government bonds.

BigFatUglyBubble's picture

Why do college grads wear a square hat and a black robe? Well, It has to do with who built the Washington Monument. 

 

Oldwood's picture

We learned our lesson.

NEVER allow a loan to default

 Simply do as China and so many others have and roll that sucker over. There is NOTHING as secure as debt that will NEVER be allowed to default.

Dr. Engali's picture

Pfffft, debt schmebt. Just take it to the grave with you:

Americans Are Dying With an Average of $62K of Debt

http://www.foxbusiness.com/features/2017/03/21/americans-are-dying-with-...

HRH Feant's picture
HRH Feant (not verified) Mar 22, 2017 5:59 PM

The parents and grandparents of these snowflakes are going to wake up, soon, and scream bloody murder because their bank account, IRS refund, and SS payments are being garnished to repay loans.

If you can't pay cash for your education or are not smart enough to qualify for scholarships you probably ought to consider something else. Debt that you owe to someone else makes you a wage slave. But I suppose that is the point. To create more wage slaves and debt surfs that will never be free.

SmedleyButlersGhost's picture

"... the student default rate is 11.2%"

 

A student loan that is not being paid per an agreement is not in default.  So the number is multiples higher.

 

Bullshit old news article with minimal research. 

bilbert's picture

 I believe the term "Default" in Student Loan terms means 9 MONTHS of not paying:

"What is a default?

The definition of a federal Direct Loan default is: The failure of a borrower and endorser, if any, to make an installment payment when due, or to meet other terms of the promissory note, if the Secretary finds it reasonable to conclude that the borrower and endorser, if any, no longer intend to honor the obligation to repay, provided that this failure persists for 270 days. 34 Code of Federal Regulations 685.102".

I wonder how many student loans that are "ONLY" 6 MONTHS late will ever be repaid??  Can you say: "5 Percent"?  Sure you can.........

http://www.studentloanborrowerassistance.org/collections/federal-loans/d...

With home and auto loans defining "Default" as a mere 3 Months delinquent, this MOFO gonna get real ugly.

 

 

Zero-Hegemon's picture

Long student loan bubbles. Let's say TWO trillion before anything significant happens. An entire generation of debt slaves that cannot organize worth a fuck to overthrow their captors.

unsafe-space-time's picture

They can organize. They are a bunch of commies who love their captivity. They will overthrow whom ever soros tells them to overthrow. 

Zero-Hegemon's picture

"They can be organized."

~ Fixed it for you

I am Jobe's picture

I thought college and student loans were for getting laid and beer bongs. No one told me that it has to be paid back . Parents are proud of their kids. Got syphillis , parents will help. You don't see fucking Asian kids partying , they are fucking studying their azzz off or runnign a 7-11 during their breaks.

Seasmoke's picture

I'm noticing an awful fatigue everywhere. In the authors. In the readers. In ZeroHedge. And in everyday real life. 

Jupiter's picture

Really sick and tired of hearing about the student loan "bubble".

Of course there is a difference - student loans are _not_ discharchable.

Any student in a developed nation is worth $250K over their lifetime.

That will go to the bank.

Where is the crisis?

 

Jupiter's picture

Really sick and tired of hearing about the student loan "bubble".

Of course there is a difference - student loans are _not_ discharchable.

Any student in a developed nation is worth $250K over their lifetime.

That will go to the bank.

Where is the crisis?

 

Jupiter's picture

Really sick and tired of hearing about the student loan "bubble".

Of course there is a difference - student loans are _not_ discharchable.

Any student in a developed nation is worth $250K over their lifetime.

That will go to the bank.

Where is the crisis?

 

Jupiter's picture

Really sick and tired of hearing about the student loan "bubble".

Of course there is a difference - student loans are _not_ discharchable.

Any student in a developed nation is worth $250K over their lifetime.

That will go to the bank.

Where is the crisis?

 

Thinkpad's picture

Exactly this is not new news. What I found jaw dropping an article in the last week or so almost half of students polled think their debt will be forgiven say what?

bkboy's picture

No, it won't go to the "bank".  These are direct government loans.  And if the student doesn't pay, it is the only type of debt that is enforceable against the student's tax refund and, later, social security payments.  So think of student loans as a payday loan with a very long maturity, i.e., when the student reaches Social Security age.

 

Thinkpad's picture

a lien on any future payments in arrears. 

therover's picture

You really think these kids will see SS payments ?! NEVER.

Jupiter's picture

Sorry my bad - had a weird internet lag when I was trying to save this.  Apologies.

hotrod's picture

It is different.  All the colleges public and private have already socialized the EXPENSIVE cost of their product on the American public.  Maybe one fifth of the dept is private lender owned but the majority is owned by the PUBLIC.  As I recall about 150 bilion has already defaulted but Obama swiftly reduced payment terms the end of 2014 so the default rate would not sky rocket.

There are a lot of games being played to renig on paying that is for sure.  However, I am sympathetic to naive kids that are brow beat into taking on the huge debts or feel like a failure.