Student Loans And Fake Rescues Of Mortgagees

July 26, 2008

Elaine Meinel Supkis

A reader kindly sent me an email detailing the terrible difficulties their son faces trying to pay for his education. Also, we get more details about the government's bailout of people who went way over their heads in debt using their homes as ATM machines. It is clearly a NO GO. Won't work at all. Easy to explain why. And world markets are in a panic. Even the commodity markets are now spiraling down the drain. Time to understand what went wrong and where it went wrong. More banks, by the way, went belly up in the last 24 hours. There are a few thousand more to go. Alas. America is NOT capitalized. We were cannibalized.

An email came in today:

Thank you so much for hammering the student loan scams. We are dealing with my son's college loans and credit card debt right now. I'm sure our story is rather typical.

My son just graduated magna cum laude from a private college. When he applied in 2003-2004, the financial aid office talked him into extending the terms of his student loan out to 30 years so his initial payments would be managable, and he was told he could renegotiate the loan later as his earnings increased.

He also applied for a citibank credit card and received a 4% interest rate so he could purchase incidentals not covered by the loan.

We paid out-of-pocket for his off-campus apartment, meals and living expenses and actually saved money even at 1500 dollars per month--the college charged more. That came to around $60,000 over 4 years.

Upon his graduation, we looked over what we owed. My son's part which he has to begin making payments on six months after graduation, is $27,300 at 6.75% interest.

Our "Parents Plus" student loan comes out at $49,700 at 6.25%.

Now for the bad part. That easy credit bank credit card that started at 4% interest has now risen to 11.9% interest and my son owes $22,300 on it. We made the payments and have never been late on a payment and our credit rating is excellent.

If by some miracle, my son were able to pay off these debts at these interest rates over the 30 year time period, he will pay back nearly three hundred and fifty thousand dollars. Add the $60,000 we paid out of pocket, and he will have paid over $400,000 dollars for an education that would have costs less than $100,000 before the Republicans took office. Elaine, that is nearly half a million dollars for a college education, and most of it is interest paid to the loan people and credit card companies. This is a terrible situation.

Enter our evil lawmakers who are owned by the financial institutions. When Congress finished adjusting the laws pertaining to student loans, my son is officially enslaved for three quarters of his working career IF HE CAN FIND ANY WORK IN THIS DEVESTATED ECONOMY.

Just what did congress do?

People with student loans cannot escape them by declaring bankruptcy. Whatever wages the person has, will be garnished for the monthly payment.

If the initial term of payment was for 30 years, there can be no renegotiation of the loan. You either pay it off in full or make a payment each month until it is paid off.

If the minimum payment is a set amount, and the person makes four payments this month, the minimum payment is due again next month--you can't skip a payment if you are paid ahead.

If, for any reason, you miss a payment, your interest rate goes up and the more payments you miss, the more the interest rate goes up.

The only good thing about this scam is that if you make all payments on time, your interest rates drop a point or two.

So, Elaine, my dear son, without help, will essentially be enslaved for a majority of his working career. This is Biblical style usury and enslavement.

Thanks for all the details [many of which are deleted to keep everything as anonymous as possible]. They do not merely want you to pay the principal. The principal went to the school, etc. All they get from this process is the fee. The prize here, the frosting on your son's debt cake is in the interest payments. And so long as these are well above the Treasury rate, this is PURE GOLD to the lenders! THEY get a free $400,000 non-stop 'pay, pay, pay!' for years and years. People supposedly holding such things call them 'securities' and 'bonds' because it makes the lender secure and puts your son into slavery.

I am just livid about all this! Forcing everyone to go to college even if the job doesn't require the intense training of college, this is standard procedure today. One cannot be an authority on anything without that very expensive and valuable piece of paper. Of course, in down markets, just as the deed on a house can represent less and less wealth or paper money loses value rapidly, so it is with college degrees. In bad markets, it can rapidly become totally worthless!

Before Bush and the DNC/GOP elimination of college loan bankruptcy rights, if the degree became worthless, the student defaulted. If the degree was worth a good income, the student would pay it back. Simple economics! But so many college degrees are actually worthless. I should know! I quit my program when I got pregnant with my first child. I didn't study economics or history. But since I can read and hang out with historians and economists and even better, hang out at bars in Lower Manhattan, I learned a lot of stuff. When I worked for various gamesters on Wall Street or the NYC real estate markets, I learned a tremendous number of things from very canny people who had seen everything.

Also, my dear departed father-in-law was a mathematician, economist and publisher. He taught me many things. He was very smart and always lost money on Wall Street. Another man I learned a lot from always made money on Wall Street but couldn't stay married and lost fortunes in courts. Classic gnome.

Mr. Cohen told me once, 'NEVER EVER get involved in any government program or rescue operation. Take your lumps and start over again. But don't go to them for help. Once they notice you, they never let go. Never.'

Joe, on the other hand said, 'Remember, all temporary government programs become permanent blights and end up destroying what they set out to save.' These two sayings are very important. When my present husband was injured at work and we had to sue several entities, our income vanished during this time since I had to nurse him on top of everything! During our tremendous poverty, we lived in the tent complex I wrote about a few weeks ago. We struggled along without welfare or any government help, large or small.

This was hard, hard work but at the end, we kept our property so I could build a house and we picked up our lives and rolled onwards, now we live in a lovely house, debt free. Which I built myself, by hand. The hard way. Everyone says they don't want the government in their lives but end up that way. Of course, due to workman's compensation, we are under government scrutiny. But this is something we won because it was our due, not a hand-out. We far, far would rather my husband be a professional museum photographer! Not an invalid.

Back to school debts: the government decided, due to lobbying efforts by very wealthy gnomes, it should be made utterly impossible for students who can't get a good return on their degrees to still be stuck with it forever and ever. This means no one can go to school to learn in the classic sense, to explore the intellect and to learn about hidden talents, pick up rational, complex skills and in general, become 'civilized.' Now, if one isn't focused entirely on a money-making career, this can be FATAL. Our schools are deteriorating into simple journeyman apprenticeships for people praying there will be a job when they pass all the hurdles.

I know so many young people who begin college with the idea of becoming something and then change their minds! I did this! It is COMMON. But now, it is also very dangerous. When I went to college, it was fairly cheap. Very cheap, indeed. I petitioned to live off campus and was allowed this boon at only 17 years of age [privileges of the ruling class]. I only worked in the summer and made enough money to support myself in school. Rent was only, get this, $45 a month for a one bedroom house. I upped my status by taking on a 2 bedroom house for only $65 a month.

That was the sixties. But suddenly, starting in 1970, inflation took off. Rents shot upwards! Wages didn't keep up. I had to start working part time during the school year. Fast forwards to today: my children had to work full time while going to school or use other harsh methods to fund their schooling. Rents now are ten times higher than in my own youth. It is far, far harder for them. And this angers me a lot! My heart goes out to the middle class which is being squeezed at both ends: they are expected to pay even though this is very harsh for them. This is why our once-solid middle class is in danger of a full collapse.

Now to go back to the issue of the Fed 'rescue' of people deep in debt due to high housing prices:

Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home.

To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time.
*snip*
However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.

Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they'll pay a "3% exit fee" of the mortgage principal to the FHA when they resell or refinance.

Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.

After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

Good grief. So many wrong things here! First off, the problem is, people went for the risky loans because they didn't qualify for traditional loans! Then, they went bankrupt. This was due to the ridiculous high prices of houses that often were shabby housing. Most people who got mortgages this last 5 years were not buyers but people running up debts on their properties because of the artificial inflation of the houses' value! This is a debt crisis, NOT a housing crisis. People wanted to scoop up cheap debts and did so. It was as if the Federal Reserve's Brink's truck overturned on Interstate 5 in California and everyone rushed in to grab the loot and run off again!

Now, the same people can't deal with the results of this mess they created when they ran up debts to the uppermost limits, using their homes as collateral. Since 99% of these poor saps did this when markets reached their peak in 2006, they are all already well 'underwater'. I bet virtually NONE of the people needing to be saved from their own follies are under 95% in their debts! And since many buyers used loans as down payments, they don't qualify! And if they got second mortgages and other instruments which were handed out even to people who were above 110% in debt on the value of the house at the height, now all of that is MUSH.

Each month, the value of houses fall. They are in a deflationary spiral! There is no escape here. The government is willing to take a 5% haircut, not a 25% or even 40% haircut! On top of this, for the first few years, the government gets any gains on the houses' value increases. FOREVER. They get a 50% above the amount of the rescue loan!!!!! GAH!!! Some 'rescue'! Obviously, the US government will be a permanent landlord/partner who dictates all terms! I assure everyone, this is a TRAP.

Furthermore, the government requires strict accounting of income, etc. Payment of all loans. No more 'ATM' business since the government holds all increases in value on ITS books, not the helpless homeowners. What is particularly stupid here is, if anyone has the qualifications to be a standard mortgagee, they would not be in trouble! It is all the people who jumped for NINJA loans who need to be rescued. And frankly, they and their bankers have to take their lumps. Jump into a shark pool, you get eaten! That's life. Hopefully, children watching this will learn harsh lessons.

Fannie, Freddie Subordinated Debt May Be Cut by S&P

(Bloomberg) -- Standard & Poor's may downgrade the subordinated bonds of Fannie Mae and Freddie Mac, surprising investors who had anticipated the securities would be supported by any Treasury rescue plan.

The potential cut would affect $19.2 billion of AA- rated subordinated debt at Fannie Mae and Freddie Mac, according to data compiled by Bloomberg. The cost to protect the bonds from default rose for the first time in three days. S&P said it may also downgrade $26 billion of preferred stock, pushing down the securities in New York trading. The AAA ratings on the companies' senior debt were affirmed with a stable outlook.

New legislation authorizing a backstop of the mortgage- finance companies leaves it up to the Treasury Secretary to decide whether to honor preferred dividend payments or to repay subordinated bondholders before the government, S&P analyst Victoria Wagner said in a telephone interview. That ``ambiguity'' casts a cloud over the securities, she said. Once analysts have fully analyzed the final legislation, the ratings may be cut one or two levels, she said.

And the pros know this rescue is FRUITLESS. It won't work. Period. We feel this in our bones. The government, the bankers and the reckless public that fell for the lure of easy lending all have to be educated in reality: you can't run up infinite debts! This valuable lesson is NOT being heeded at all! Proof: both the Federal Reserve and the Federal Government are pushing more debts onto ledgers and are enabling bad economic outcomes, not good ones. We are not living within our collective means at all! We have to change course or we die! Until this truth is accepted, all rescues will fail.

Panic Building on Wall Street

Fannie Mae (FNM) and Freddie Mac (FNM) were on the verge of collapse, only to be saved by the full faith and credit of the United States. But in reality the Fed did not save them, YOU did. If you are a U.S. citizen, the bailout has your name on it and you don't even know it, do you?

When a financial institution, bank, broker, hedge fund (Long Term Capital Management) gets bailed out, it is the taxpayer that ultimately pays for it. The Fed “loans” money to the failing institution and rewards mismanagement, but the loan is paid for by collecting taxes from you! How often has your friendly banker asked you to bail out others that have made poor business decisions? The answer is, plenty of times, but those who read the mainstream press never get a clue that the full faith and credit of the United States means simply, the ability of the federal government to tax its citizens. It is just that simple!

HAHAHA. Right on the anniversary of my big article about Panic Attacks from last year!

Here is my July 26, 2007 story: PANIC!

NEW YORK (MarketWatch) - Stocks plunged Thursday as anxiety about shaky credit markets and the troubled housing sector swept Wall Street, pushing the Dow Jones Industrial Average down nearly 400 points.
"We're seeing panic in the market today - you can almost cut the level of fear with a knife," said Al Goldman, chief market strategist at AG Edwards.

No new news? Are you kidding me or what? The news that China is now #3 in the world's economies, is news. And the fact that the Japanese workers are committing terrorist attacks against nuclear power stations in Japan as well as the worst terror of them all, they are going to vote the corrupt, evil LDP out of power at last: this is all very big news! Not that the average American sees this coming!

The key, all along, is the Bank of Japan and the government of Japan supressing human resource costs in order to have this fake depression whereby they could give Toyota and other high-value exporters super-cheap money so they could use a super-cheap yen to undercut coemptition---THIS IS ALL ENDING. As I predicted.

Japan cannot follow this course any longer. They are at a terminus point. Starving the Japanese workers to death isn't an option. Forcing them into labor similar to under Mao in China is unacceptable. Rebellion is in the air. The new government of Japan will, next month, put in new bank officers at the Bank of Japan and I suppose they won't tar and feather the fascists who ran it before but I would suggest this is a good idea.

In China, the Chinese government is pulling on the reins and they want to cut trade with the US and re-direct it to Africa and South America. On top of this, both Japan and China will now be using their vast FOREX reserves to buy up interesting stuff like working with Russian oil and Putin, just for example.

I will suggest that the status quo is breaking. And a new one is rising. And it isn't one that will feed us endless loans and hold yet another two trillion in trade dollars!

Back then, virtually no one was talking about how the Japanese carry trade was flooding the US with red ink. This malicious program was greeted by the gnomes as well as our reckless spending government as manna from heaven. We wanted more and more and more. And when it ceased to flow after 7/17/7, there was a painful pause. Then the chorus of, 'We need more liquidity' began to be shouted hither and yon. Everyone on TV began to bleat about how we needed to get banks to restart the liquidity, aka, red ink, flowing. I said, 'Nope. Can't happen. Too much red ink already. Flows will now change direction. Look to China!' And of course, China began to raise reserve ratios and interest rates while the Fed and other G7 central bankers tried to lower rates. All the G7 were most anxious to make the yen weaker again. They knew where our lending was coming from: the Bank of Japan.

Well, even today, there are frantic efforts to get this stupid carry trade restarted. But it won't because it can't. Instead, Japan is now contracting, not expanding at 3-5% a year. And the US is one sick puppy that can't grow, it can only throw up on the carpet.

Credit Unions Slowly Fill Void As Payday Lenders Leave D.C.

In January, legislation went into effect capping interest rates in the District at 24 percent, effectively driving out the area's payday lenders, whose business model is wedded to annualized rates of 300 percent and above. Credit unions are now slowly filling the void in small-dollar loans. At least half a dozen District institutions are attempting to reinvent the loans as a tool to help bring hard-pressed borrowers closer to financial health.

The credit unions' products vary, but generally they are loans of $300 to $1,000 with an annual percentage rate of up to 18 percent. Unlike payday loans, in which borrowers sign over part of their next paycheck for the cash advance, the credit unions' new products have longer terms, from thirty days to a year.
*snip*
The small loans provide a new, though minor, source of revenue for the institutions. The number of loans they issue is tiny compared with the large volume once generated by the payday lenders. In 2006, the latest year for which figures are available, the two largest payday lenders in the District made a total of 260,000 loans, worth $125 million. This year, by comparison, "stretch pay" programs -- payday-loan alternatives offered at 43 credit unions nationwide -- have issued only 8,656 small-dollar loans. Just a few hundred of those were made in the District.

Usury continues. People need this payday scam because they are used to it now. If it became unavailable again like it was before Nixon, we would not see people who are poor, overspending nonstop. Back when I was younger, the Mafia was the lender of last resort. And they were paid or else. Boom. So people didn't go to them lightly. There was naked fear. The interest rates charged on these loans are ridiculous and should be illegal. But there is no FEAR involved so people are increasingly falling into the clutches of this system. In DC, it is gone. But DC is very small. Everyone simply drives for an hour and bingo! There they are!

Just like gambling has spread like a blight. These crummy, destructive systems are everywhere and are wrecking our morals and our social systems! When gambling was illegal, again, one got the satisfaction of breaking the law [I was once a hippie, we loved breaking arcane or stupid laws] while not going right off the financial cliff like when things are legal. When they are legal, there are no barriers! So people fall apart, fast. There is no fear, so people don't fear doing things that eat up their wealth and destroy their health. So it is rather funny to say that making some things illegal is actually rather useful.

East Hampton Reels as Billionaire Town Floats Debt

(Bloomberg) -- East Hampton, New York, where billionaire Ron Baron paid $103 million for an oceanfront estate last year, may have to borrow to close a deficit, as even the richest towns get pinched by rising costs and lower revenue.

The Long Island sanctuary for the rich, where lobster salad sells for $85 a pound, has been hit by a double whammy: a tripling in workers' health costs since 2003, which officials failed to anticipate, and a 43 percent drop in revenue from mortgage taxes related to real estate sales in the first half of the year from 2007. Town officials for the first time plan to reduce the deficit by borrowing, after winning state approval for a $15 million bond sale.

California is broke. Der Terminator is terminating jobs, cutting wages, shoving hard to move everything downwards. Last year, California boasted about being one of the richest states in America and equal to most major countries like say, Japan or England! Now, it is falling apart. California's wealth was based on a debt pyramid of huge proportions. Its ports were busy destroying the US trade surplus and helped to make it record deficits. Irresponsible house building and bidding up of properties was utterly out of control there. California is now busy bankrupting not just America but the entire planet earth! Gah! Talk about insane!

Now, the tsunami if debt is crashing into the Gold Coast of New York, the other financial pole in the US. The Tristate Port Authority also is working hard to destroy our trade balance. I can see gargantuan ships with no names on them, sailing into harbor to disgorge Toyotas or computers or whatever. The rich financiers are now 'leveraged' to the point, they can't fix their own debts despite 4 years of multi-million dollar bonuses. They created this entire mess alongside the Federal Reserve. And they lobbied Congress to do the crummy things they did and everyone is at fault because everyone thought that DEBT WAS WEALTH. It is obviously not.

So about the budget and trade deficits? This is what we should have Congress talk about. This week, Bush and Congress are happy because they promised to pay drug companies $40 billion over the next five years to save foreigners with AIDs. This would be wonderful except they are NOT raising taxes to pay for this generosity. This is just a typical example of how our empire is destroying our finances. Either Congress cuts $40 billion from the Pentagon or they should say, 'Sorry, we can't even save Americans, forget the entire planet.'

45 million Americans have no health insurance. We could start there, just for one example.

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