Not so much mortgages as easy access to mortgages despite obvious financial risk. Bad underwriting practices and benefiting from default, inflate the prices of things the loans are needed for. When loans are too easy to get, it inflates prices beyond the risk of default.
During the housing boom, banks were making a killing on all loans, even bad ones. When a lender defaulted they were able to recoup their potential losses in a rising market at foreclosure. They even had a shot at writing a new loan for the same property. The problem with this kind of action is it slowly âpoisons the wellâ for the banks. The market only continues to rise as long as people arenât defaulting on their loans in large numbers all at once. Once the market is flooded with people getting out from homes they canât afford, prices start to drop. Then the banks have their âOh Shit!â moment.
The end result was a much stricter lending environment and a far more stable housing market in most areas.
Which is about 15-20% these days. Student loans have maximums, most of which are below the cost of private universities and the additional costs are then made up from private loans similar to this with higher rates, usually around 18% these days.
Regards, private student loan haver whoâs not declaring bankruptcy but totally understands someone who would.
I think prices would also drop, but student loans were originally set up to address real problems, and they still have some utility in that regard. Theyâre currently quite a mess, though. Iâm all for Bernieâs free college tuition plan, although that very likely has its own set of issues - not everyone needs a degree, and itâs easy to imagine a world where jobs that shouldnât require a college degree suddenly do, just because so many people have them. maybe thatâs still better than the status quo
It used to be that if the bank handed you a mortgage and you defaulted on it, it was the bankâs loss. That made them careful about loaning money.
Congress, during the Clinton and Bush II years, deregulated the banks. The wall between regular and investment banking was removed.
Now suddenly those mortgages were bundled up and turned into investment bonds. Now it was the investors who were on the line for any losses. Now there was a complete disconnect between those handing out the mortgages, and the risk.
Which naturally led to âliar loansâ, where the industry as a whole urged people to lie about their finances to get a loan. Those handing out mortgages had nothing to lose and everything to gain.
And that was only the first step of what led to the 2008 meltdown.
My wife has one of these Citibank law school loans. She got it as a bar exam âbridge loanâ or something. We canât deduct on our taxes the interest we pay like we do on our other student loans because the loan wasnât for a qualified educational expense like tuition. It was for personal and living expenses while she studied for the bar the Summer before she started working.
This something people really donât get. Bankruptcy is not just some humanitarian gesture, itâs more than that. It creates a disincentive to unpayable or outrageous debts that wreck the economy.
That was because he cosigned, so it wasnât âpassed on,â he had liability from the start. Itâs still sad, and still stupid. But I mean even if it was dischargeable by bankruptcy⌠ALL debts carry risk. This risk is inherent to the enterprise, and I see no reason to create special rules to reduce or eliminate it. Lend at your own risk. Donât like it? Donât lend.
So it sounds like ACTUAL student loans (ie, things backed by the government) are still non-dischargable, but that general loans where one of the requirements are âyou need to be a student!â donât fit that bill.
Good news, but itâs kind of grabbing the low-hanging fruit of the student debt awfulness, no?
I do completely agree with you, you get paid interest on loans in part because you might not get the money back. You use the interest from your good loans to cover your bad ones. If you canât do that, you should rightly fail as a business. The current narrative around loans totally leaves that out, as if they get paid interest merely because we owe those that already have a lot of money.
Banking deregulation goes back a lot further than Clinton. The origins are more Reagan and Bush the Elder. (see Savings and Loan collapse of the late 1980âs). One feature of deregulation for housing loans was the introduction of ARMâs and Interest Only loans for purchasing primary residences. In the past such loans were only generally the province of short term investors and speculators. Banks pushed these on people even when they could afford fixed interest loans because the usurious nature of the bankâs terms and the market for loan refinancing.
I bought a home in 2005 with a 20% downpayment and had to fight like hell to get the lender to give me the fixed loan I wanted. I came into the conversation armed with knowledge of what I wanted. I doubt many first time homebuyers were back then.
The rise in interest in residential real estate came as an alternative to the collapse of commercial real estate and securities following the Dot Com bust, major stock manipulation scandals in the early 00âs and 9/11âs physical effect on the financial markets.
Banks didnât care so much on defaults because the market was not only rising dramatically, but so far outside the realm of supply and demand that idiots thought it would never go down. That this rise was permanent. Of course this is what people say during any bubble. Foreclosures allowed banks to recoup their losses.
Bundling toxic debt into investment bonds which were fraudulently rated and sold to mutual funds and retirement funds allowed the housing market to poison the securities market as well. Thus causing a collapse of two generally complementary markets at the same time.
One telling feature about the market now is the paucity of foreclosures. Banks hold on to properties and have âshort salesâ because the foreclosure prices nowadays are usually much higher than the value.
Itâs really a âwe know youâre going to be richâ loan, like the significantly greater credit given to first time credit card holders majoring in other lucrative trades (Engineering etc.) than to humanities majors.
That is how its marketed, but not the reality of it. It would only make sense if the lenders and schools relied on stats for job placement and average post-graduation salaries for its students. Which they do not.
Many schools have been falsifying such stats to lure students in and charge them ridiculous tuition in comparison to job prospects. Law schools and business schools being the most common offenders here. It also does not make sense considering that the denial rate for student loans is practically nil. If they were seriously being underwritten with risk in mind that would not be the case.
I think the reality is probably more like big banks just want to give out as many loans as possible to whoever possible without any regard to whether they can be paid back, counting on the government to bail them out again when the whole thing crashes.
Cory got this one completely wrong. As a recently minted lawyer, the bar loan clearly isnât a student loan. Itâs a private loan given to you AFTER you graduate to cover your cost of living while you study for the bar exam. This will have zero effect on regular student debt (the kind you borrow to actually go to school) and has nothing to do with whether it was a purely private loan or a government subsidized loan. Basically, this was a bank betting on the fact that as a law school graduate, this person was more likely to repay and so extended an unsecured loan to them. At no point was this linked to actual education.
Source: I had a bar loan, as did most of my classmates. When youâve mortgaged your future to the tune of several hundred thousand dollars in hopes of a career that realistically pays 50-60k, it is difficult to care about another ten grand in loans or even financially sound decision making.
Well, you say that, but this was a court decision where Citibank was arguing that it was a student loan. So either it isnât really that clear that it isnât a student loan, or Citibankâs legal team (who are presumably lawyers themselves) suffered some kind of mass stroke.
