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As HELOC Delinquency Rates Hit A Record, Are Student Loans Next?

Tyler Durden's picture





 

Today the Fed released its quarterly report on household debt and credit, which merely recaps already public data but with some additional nuances. While the focus of the report is on the purported ongoing consumer deleveraging, what has to be highlighted once again is that the bulk of the consumer "deleveraging" is primarily at the mortgage debt level, which as the NY Fed's blog has shown, and the reason why we quotation marks above, is because the majority of the debt 'reduction' for the third year running is due to debt discharge, i.e., forced reductions in debt arising out of default, bankruptcy and other contract termination events, and not due to actually generating incremental equity (cash) used to repay debt.

And while we will allow readers to peruse the full slideshow presentation at their leisure below, two things need pointing out. First: as we have been harping on for over a year, consumers may be getting their mortgages and credit cards discharged, because these are non-recourse, and the only trade off is a hit to one's credit rating, but their student loans keep piling up, and according to the Fed was just shy of $1 trillion at the end of Q2, a number which has since surpassed the psychological barrier. The chart below shows that there is no other place student debt is going except up and to the right...

But the punchline is comparing student debt to one other favorite product of the housing bubble generation: HELOCs. We note home equity lines of equity because as of June 30, 2012, long after HELOCs were widely available to Americans locked in a rabid pursuit to extract as much equity as they could out of their homes, is when the 90+ day delinquent rate on this product hit an all time high of 4.92%, and is finally rising at a breakneck speed. What is fascinating is when one re-indexes the delinquency rate on HELOCs and student loans. While we admit that the "discharge" option on real estate-backed debt does have a material impact, the reality is that once the prevailing mode of thinking is one of just not paying one's student loans, it will be not the student loan chart which is already parabolic, but that which tracks delinquent student loans that will take its place in the exponential hall of fame.

Note the surge in HELOC delinquencies now that the HELOC product is no longer a fad, and consumers can't wait to stop paying back debt which will never be worth even one cent courtesy of the secular loss of real estate value and pervasive underwater prices. The flat line is student loan delinquencies. Soon to quite soon the black line will start imitating the red one. At that moment, run.

The full NY Fed consumer debt presentation below (pdf)

 

 


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Wed, 08/29/2012 - 13:03 | Link to Comment madcows
madcows's picture

Bring it! All out default, Bitchez!

Wed, 08/29/2012 - 13:09 | Link to Comment donsluck
donsluck's picture

Cash and PMs, that's all that's left.

Wed, 08/29/2012 - 13:23 | Link to Comment Ruffcut
Ruffcut's picture

Beg, borrow or steal.

Apparently no one can pay any of it back.

Wed, 08/29/2012 - 13:39 | Link to Comment ZerOhead
ZerOhead's picture

More like "Beg, borrow and steal."

Remember the Goldman rule...

Luke 6:31

"Do unto bankers as bankers would have done unto you..."

Wed, 08/29/2012 - 13:39 | Link to Comment Vincent Vega
Vincent Vega's picture

The Gospel according to Roy: Blessed are those who expect nothing for they shall not be disappointed.

Wed, 08/29/2012 - 14:12 | Link to Comment AldousHuxley
AldousHuxley's picture

student loan = very expensive real life education to young americans about personal finance

 

George Bush doesn't want smart people to compete agianst in life.

Wed, 08/29/2012 - 14:26 | Link to Comment Doubleguns
Doubleguns's picture

GW aint competing any more. He crossed the finish line a long time back. Now he just sits and watches all of us killing ourselves and he will soon be joined by BO. I am sure they will have good laughs over our struggles and will be slapping each other on the back laughing at us.

Wed, 08/29/2012 - 14:47 | Link to Comment Muppet of the U...
Muppet of the Universe's picture

Senor Huxley, what is your take on the student debt bubble.  There is no doubt in my mind that this is an epic bubble that won't get repaid.  But does this really mean the end for the derivitives based on it, considering that student's simply cannot default on this debt and are now endentured servants to the system?

Wed, 08/29/2012 - 15:36 | Link to Comment AldousHuxley
AldousHuxley's picture

endentured servitude is no longer infinite. wage based repayment for 10-15 year max.

that's refinancing.....stretching out loan terms for lower payment...easy on the cashflow but in the long term you pay more. basically lenders know it is impossible to recover all principal amounts, so they want to salvage as much as possible.

 

other countries have student loan too.....but it is paid in terms of military service and living with your parents while going to school....even US had them...it was called a draft.

 

look at the board of directors of schools....full of corporate execs....they just want workers while externalizing the cost to the worker/public.

 

smart kids won't have trouble. they get scholarships...they pick the right majors or have professional schools who will teach them some practical skills....it is those who belong in trade schools who got suckers into "college" mostly as "first in the family" (so easily duped by "liberal arts" touting administrators)

 

 

I can't sympathize with kids who majored in useless studies in low ranked schools just as I can't sympathize with illegal aliens who bought $500,000 homes on Alt-A loans.

STUPID IS AS STUPID DOES

 

 

 

 

Wed, 08/29/2012 - 19:46 | Link to Comment deez nutz
deez nutz's picture

 I can't sympathize with kids who majored in useless studies in low ranked schools just as I can't sympathize with illegal aliens who bought $500,000 homes on Alt-A loans.

sympathize with all of us, we're going to get the bill on it all.  Inflation will make it all better.

Wed, 08/29/2012 - 13:42 | Link to Comment NotApplicable
NotApplicable's picture

Looks at 9% rate on my "education" loan.

*ponders the possibilities*

Wed, 08/29/2012 - 16:49 | Link to Comment monad
monad's picture

I thought my life would be about more than lying & starving people, but I think I can do that. I just won't feel as good about it as they do.

Wed, 08/29/2012 - 17:40 | Link to Comment Zero Govt
Zero Govt's picture

there's just no sector of the economy socialists promising to "do good" cannot hook you up to bankers as a debt slave

Govt & Banking: a marriage made in economic Hell

Wed, 08/29/2012 - 13:35 | Link to Comment Hype Alert
Hype Alert's picture

But, keep in mind, this is good for tax receipts because any debt that is discharged is considered income and the ex-debtor owes tax on the discharged amount.  Look for the pumpers to claim increased tax receipts from this discharge and the market bubble capital gains to be more signs of recovery.  Until they vaporize.

Wed, 08/29/2012 - 14:27 | Link to Comment Doubleguns
Doubleguns's picture

Bankruptcy eliminates that IRS problem.

Wed, 08/29/2012 - 14:33 | Link to Comment Vincent Vega
Vincent Vega's picture

Nope. Can't bankrupt the IRS.

Wed, 08/29/2012 - 15:38 | Link to Comment Whiner
Whiner's picture

You can't discharge income taxes under three years old in a bankruptcy, but there's no Cancelation of Debt Income imputed to an insolvent taxpayer, including one filing bankruptcy. I think that's his point. If elected, I will repeal the nondischargibility of student loans in bankruptcy and abolish the 100% government guarantee of these private business loans. Many of these schools like Devry enrol goofy kids, even homeless people knowing they will collect it all from Uncle Sam which is you my friend. Stay thirsty.

Wed, 08/29/2012 - 19:03 | Link to Comment TruthInSunshine
TruthInSunshine's picture

You and me bro. I like the cut of your jib. Make me VP and we'll return to an economy where capital is freed for use by the true entrepreneurs & job producers, and we'll let the parasitic banking/financial/Wall Street criminal outfit firms sink or swim on its own merits (which will lead to the impaired among them sinking like a lead rock, as it should be in a capitalistic system).

Wed, 08/29/2012 - 16:50 | Link to Comment monad
monad's picture

If we all jump together...

Wed, 08/29/2012 - 14:09 | Link to Comment TruthInSunshine
TruthInSunshine's picture

It's all good. Education has become an industry, rather than institution, onto itself, set up to provide many jobs and high wages for deans, professors & other 'educators,' where many "teachers," "professors," and other "educators" earn lavish salaries, benefits and retirement packages the likes of which would make even white collar non-"educators" envious (and many of the "educators" even acquire the ultimate prize of "tenure").

This is true of many of the 'credible institutions,' which thrive off of a debt system pushed by Wall Street Institutions, which produce reams of graduates (many who are intelligent, worked hard and have honest intentions) for an employment market that has no use fo their newly acquired degrees nor areas of study.

And in the ultimate 'tell,' it's so convenient that the bankruptcy "reform" in recent years categorized student loan debt as one of the very few forms of debt that can never be discharged via the filing of a bankruptcy petition, no matter how dire one's individual financial situation may be.

Thanks, 'educators!'

 

Then, there's this even more perverse level of foolishness:

 

Wed, 08/29/2012 - 14:32 | Link to Comment AldousHuxley
AldousHuxley's picture

when education institutions have department of marketing, you know they are selling shit people don't need by creating artificial demand.

corporations get around this by importing educated people from abroad.

it is time for students and parents to cut the cord.

Wed, 08/29/2012 - 14:43 | Link to Comment CaptainObvious
CaptainObvious's picture

Yup.  I've already told my younguns that I will finance trade school, which offers the prospect of immediate, well-paying employment in fields that are desperate for new hirees, but if they want to go to college, they can fucking well pay for it themselves.  I'm not taking on the equivalent of three more mortgages so they can present me with degrees in Women's Studies, Ancient Norse Literature, and Journalism in the six years or so it'll take them to graduate.

Wed, 08/29/2012 - 15:18 | Link to Comment Anusocracy
Anusocracy's picture

I live in a Big Ten college town. A new record incoming freshman class.

Suckers.

Wed, 08/29/2012 - 13:45 | Link to Comment Meesohaawnee
Meesohaawnee's picture

Bullish

Thu, 08/30/2012 - 03:28 | Link to Comment Parallel FORECLOSURE
Parallel FORECLOSURE's picture

Non Secured Credit Card Defaults are litigated and converted to secured debt with an ongoing interest rate charge plus the ability for the credit card company to garnish a debtors wages. Is this article presuming that because the debt is "written off" that the debt no longer counts or is having an ongoing affect other than to one's credit rating?

Wed, 08/29/2012 - 13:08 | Link to Comment Newsboy
Newsboy's picture

Housing reset for next 10 years.

Pay the government with indentured servitude, military or otherwise, until used-up. The next big bubble.

Wed, 08/29/2012 - 13:07 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Student loans were given out just like sub prime loans yet once obama doesn't want to go after the bankers instead he wants the poor saps whose pensions funds, etc are invested in this garbage to pay for it. He would like the taxpayers to pick up the rest of it but he has opposition.

 

Private Student Loans Work Like Subprime Mortgages

 

CFPB, Obama Administration urges Congress to allow students to wipe out private student loans in bankruptcy

 

Obama Administration Backs Bankruptcy Option for Some Student Debt

snip

The Obama administration urged Congress to make it easier for people to discharge a portion of certain student debt by filing for bankruptcy protection.


The recommendation, in a report by the Education Department and the Consumer Financial Protection Bureau, wouldn't affect the vast majority of student debt, which is issued by the federal government. It would apply only to the roughly $150 billion, or 15% of total outstanding student debt, issued by private lenders such as SLM Corp.'s Sallie Mae and Wells Fargo & Co.


Consumer bureau chief Richard Cordray said Congress should consider modifying a 2005 law that, except in rare circumstances, prohibits discharging private student loans through bankruptcy.


"It would be prudent to consider whether they wish to modify the code in light of the impact on young borrowers in challenging labor-market conditions," Mr. Cordray said. He added that the law doesn't appear to have met its objectives of bringing down borrowing costs and expanding access to private loans.


Expanding the concept to federal loans would be politically controversial given that it would likely result in taxpayer losses, and Republicans have expressed reservations.

Wed, 08/29/2012 - 13:11 | Link to Comment donsluck
donsluck's picture

There should be no debt excluded from bankruptcy. It is the lender's responsibility to perform due diligence on his debtor. If interest has to rise, so be it.

Wed, 08/29/2012 - 13:21 | Link to Comment Piranhanoia
Piranhanoia's picture

You offer a new concept without explanation.  You must be god.

Wed, 08/29/2012 - 13:38 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Then you are just arguing for outright theft one persons debt is another persons assets could well be grandma's retirement. It's not the lenders who will eat these loans. Furthermore that interest you speak of is passed onto consumers. Why don't I just show up at your place of business and steal from you or better yet just take your bank account because that's the same thing. The banks did the same thing in the run up to the credit crisis ton's of subprime loans they then passed off into people's 401k's, pensions funds infesting the entire world. The student loans were the same way. The lender's should be held criminally accountable but just like subprime obama wants to give them a pass. There is also the culpability of the people taking these loans if they were old enough to take them they should be old enough to pay them back. 

"Private lenders offered student loans without confirming that recipients could pay them back -- then sold them to investors, thus protecting the lenders against defaults, a government study finds.

Sound familiar? It should: It's a lot like the process that caused the subprime mortgage crisis. Some $8.1 billion worth of private loans -- more than 850,000 cases -- are now in default, the AP reports. "Subprime-style lending went to college, and now students are paying the price," says Education Secretary Arne Duncan.

Private loans soared from $5 billion originating in 2001 to more than $20 billion in 2008, and recipients currently owe more than $150 billion. Combine private loan debt with federal, and you get $1 trillion in total student debt.

Wed, 08/29/2012 - 13:42 | Link to Comment nufio
nufio's picture

all debts should be discharged in a bankruptcy. The lender should still able to price in the risk of bankruptcy and adjust rates accordingly after performing due diligence on his debtor. Of course the banks wont support that because the only way they make money is by purposefully mispricing the risk and then selling the risky loan to the government or some idiot/complicit fund manager. 

Wed, 08/29/2012 - 14:08 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Again it's not the lender who is going to be eating these debts and there was NO due dilligence.  Left out is the borrower's btw if the people are intelligent enough to attend Harvard shouldn't they be intelligent enough to realize that if you take a loan you promise to pay it back. Taxpayer's shouldn't have to pick up the bill either. 

" These loans made with taxpayer money are awarded to students -- creditworthy or not -- as part of a public policy to help those in need afford an education. The loans are capped for undergraduates, so borrowers can’t get in too much trouble. And Uncle Sam has all sorts of repayment plans — even loan forgiveness — to help those who are struggling.

Wed, 08/29/2012 - 13:45 | Link to Comment nufio
nufio's picture

I forgot to add excluding debts from bankruptcy reduces interest rates for the debt not raise it.

Wed, 08/29/2012 - 15:24 | Link to Comment Anusocracy
Anusocracy's picture

If so, then no debtor asset should be protected in bankruptcy.

Give both sides a dose of reality.

Thu, 08/30/2012 - 03:31 | Link to Comment Parallel FORECLOSURE
Parallel FORECLOSURE's picture

I am advocating "Debt Neutrality" for consumer credit card and student loan debt.  No more interest rate charges, penalties or fees for any one who is paying down their debt without creating new debt of an equivalent or greater amount.

I'll probably link to this article from my www.debtneutrality.blogspot.com blog.

Thu, 08/30/2012 - 13:27 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Wee free money what a concept if that were your money would you give it out without someone paying you interest? And for all the people saying the taxpayer's should provide this free but then out of the other side of your mouth you claim you are worried about the debt being passed onto your children or are complaining about taxes think about it.

Wed, 08/29/2012 - 13:07 | Link to Comment legal eagle
legal eagle's picture

Bank of America is using the required debt forgiveness under the settlement with DOJ to forgine the HELOCs they knew they were not going to collect anyway, always an angle for these bankers, always an angle.

Thu, 08/30/2012 - 03:35 | Link to Comment Parallel FORECLOSURE
Parallel FORECLOSURE's picture

But only after the homeowner has been foreclosed upon, no?

Wed, 08/29/2012 - 13:08 | Link to Comment Snakeeyes
Snakeeyes's picture

Deleveraging continues, particularly in RE. AND Student Loans are booming!

http://confoundedinterest.wordpress.com/2012/08/29/pending-home-sales-rise-more-than-expected-at-2-4-rate/

Wed, 08/29/2012 - 13:08 | Link to Comment yogibear
yogibear's picture

Benny Bernanke can buy that up too.

Bernake and the Fed have become the old Soviet Central planners. All in the interest of the banksters.

Wed, 08/29/2012 - 13:09 | Link to Comment Jason T
Jason T's picture

Thats an excellant report from the Fed.  Thanks for posting Tyler.

Wed, 08/29/2012 - 13:10 | Link to Comment q99x2
q99x2's picture

Its not a right its a privilege. Get it while you can. Countdown to game over.

Wed, 08/29/2012 - 13:10 | Link to Comment MFLTucson
MFLTucson's picture

Recovery summer II

Wed, 08/29/2012 - 13:12 | Link to Comment It is a bargin ...
It is a bargin my friend's picture

Tyler..off topic but would love a piece by you on AEP and Gold

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100019683/th...

Wed, 08/29/2012 - 13:13 | Link to Comment apberusdisvet
apberusdisvet's picture

Debt slaves are wonderful;  every family should have at least 2.

Wed, 08/29/2012 - 15:32 | Link to Comment Anusocracy
Anusocracy's picture

Indebted college graduates should sell a kidney to get out of debt.

By the time they might need it, lab grown kidneys would be cheap.

Wed, 08/29/2012 - 13:22 | Link to Comment YesWeKahn
YesWeKahn's picture

China caused this.

Wed, 08/29/2012 - 13:24 | Link to Comment kito
kito's picture

the drug dealer putting out a report on the debilitating effects of his product................

Wed, 08/29/2012 - 13:44 | Link to Comment NotApplicable
NotApplicable's picture

Remember, it's for the children.

Wed, 08/29/2012 - 13:31 | Link to Comment Piranhanoia
Piranhanoia's picture

HELOC's got bailed out due to the amount of payments required in 2008.  The banks income stream collapsed and the drug money was what kept 2008 from crashing the little test dummies. (us)   Many were uncollectable without fraud due to the lending via money laundering.  MERS was made to hide everything, and every loan had a MERS number.  Add Liebor,  shake well, serve over ice.

Wed, 08/29/2012 - 13:32 | Link to Comment otto skorzeny
otto skorzeny's picture

the only people with disposable income in my McMansion 'hood are cops and fireman. small town cop down street just put in $50K inground pool and sprinkler system. all of their bitch entitiled wives drive new Denalis.

Wed, 08/29/2012 - 13:35 | Link to Comment buzzsaw99
buzzsaw99's picture

heloc in non recourse states was the moist lucrative scam evah. borrow a ton of money, default, live rent free for years and years while socking away even more cash. Why work?

Wed, 08/29/2012 - 13:37 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

I love parabolas, they never peak.

Wed, 08/29/2012 - 13:38 | Link to Comment buzzsaw99
buzzsaw99's picture

imo gubbermint backed non-dischargeable student loans are an abomination only a banker could love.

Wed, 08/29/2012 - 13:43 | Link to Comment Bastiat009
Bastiat009's picture

Paying off debt is for losers.

(do I need to say that I am being sarcastic?)

Wed, 08/29/2012 - 13:46 | Link to Comment NotApplicable
NotApplicable's picture

But it's true. Winners just roll that shit until they get TBTF, then pass it off to the system.

Good work if ya can get it.

Wed, 08/29/2012 - 14:05 | Link to Comment Vincent Vega
Vincent Vega's picture

Exactly right. Will any Soverign ever pay back the money it borrowed? Seems I saw an article some where around here: $16,000,000,000,000bama. When the elite don't pay it's called a business decision. When a pleb doesn't pay it's called being a dead beat.

Wed, 08/29/2012 - 13:44 | Link to Comment wstrub
wstrub's picture

If the assets (distilled labour) are able to move from one generation to the next in tact we will have a non productive work force.  The baby boom generation exacerbates this issue because we have had less than two children per family.  The money will be destroyed.  It has to be.

Wed, 08/29/2012 - 13:46 | Link to Comment linrom
linrom's picture

Why work when you can take out a HELOC. Let your asset do all the work. After several years your house will appreciate sufficiently so you can pay off your HELOC. Time=work, earn money like the rich do, do nothing and just watch your assets appreciate. If it doesn't work so what, you got your money.

Some might not believe that this was actually recommended in 2005-2006 on a discussion forum by some very keen individuals. I hope they bagged millions.

 

 

Wed, 08/29/2012 - 13:50 | Link to Comment NotApplicable
NotApplicable's picture

I watched people juggle half a dozen houses at a time that way. An uncle of mine managed to leverage himself up to the eye-balls buying duplexes in section 8 areas of town.

Funny thing is, I'd never learned the details except he decided to teach us all how to budget in order to escape the debt trap. LOL

Wed, 08/29/2012 - 14:00 | Link to Comment Bam_Man
Bam_Man's picture

Could be that the delinquency rates are rising on HELOCS because there is no new volume being added. (Nobody has equity to borrow against anymore). Actually total stock of HELOC balances outstnding is probably dropping due to defaults. Under these conditions, even if there were no new delinquencies (but there are for sure), the delinquency rate would still increase.

Wed, 08/29/2012 - 14:15 | Link to Comment jbc77
jbc77's picture

A trillion bucks in deliquencies on mortage debt over 90 days. What a hoot huh folks? This whole thing, this whole world we live in is just surreal.

Wed, 08/29/2012 - 15:32 | Link to Comment cosmictrainwreck
cosmictrainwreck's picture

and greeted with a big <yawn> by all.... duh...it's just "da new normal"

Wed, 08/29/2012 - 15:41 | Link to Comment chasman
chasman's picture

Are Student loans next you ask?????? F-in-a damn right there next.....Gen Y has no alliances to anyone but there selfish selves....they will get the last laugh, just as the homeowners who racked up gazillion in HE loans with toys and then defaulted.....fool me once same on you, fool me twice, Nah....ain't happening.....banks, large businesses, etc already figured out our communist socialist government and the lying sack of shit home owners....they are adjusting accordingly, just as the insurance companies are, banks are, hospitals are, etc.......gen Y....get ready for the shit storm of your lifetime...can you say inflation and higher costs......you better vote for Obama, because he is the only communist / socialist out there that is going to make sure you have food stamps via your permanent EBT card and big screen tv's and latest ipads

Wed, 08/29/2012 - 15:46 | Link to Comment Remington IV
Remington IV's picture

let's hope so

Wed, 08/29/2012 - 17:30 | Link to Comment JenkinsLane
JenkinsLane's picture

Great work ZH.

Wed, 08/29/2012 - 18:09 | Link to Comment goodrich4bk
goodrich4bk's picture

Student loans are the only kind of debt that is collectible directly from the borrower's social security check.  Therefore, it is IMPOSSIBLE for the government to lose money on student loans.  The government will just offset the defaulted loan against the borrower's SS income until the loan is "repaid" in full.

In other words, student loans are just payday loans with lower interest rates and the "payday" is about 40 years into the future.

When viewed correctly, the government is simply accelerating students' spending from 40 years hence to the present.  Neat trick, but it's still a trick.

Thu, 08/30/2012 - 00:45 | Link to Comment Demonoid
Demonoid's picture

The garnishment of the Social Security check is limited to 15%. No check under $750 can be garnished. We are talking a few hundred/month max in most cases.

Given that most of these loans are decades old by the time Social Security garnishment kicks in - and therefore, immensely larger through the magic of compounded interest - I'd say your notion that it's "IMPOSSIBLE" for the government to lose money on student loans is what's IMPOSSIBLE. The garnishment, by the time it kicks in, will not in many cases even be enough to prevent the ongoing growth of principal. In short, they will never be paid off.

Thu, 08/30/2012 - 03:39 | Link to Comment Parallel FORECLOSURE
Parallel FORECLOSURE's picture

So what it comes down is this, rather than work with debtors, the banking instutions are scarlet lettering everybody as being credit risks, which will result in hundreds of millions of debtors all over the world always paying more in interest rate charges for the next several years.

Restructuring a Debt should not be considered a default, but it presently is, and that is the core issue, no?

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