Sometimes one cannot believe the news, not for fear of it being misinformation or disinformation, but for the startling and unsettling horror stories that appear more than occasionally these days. This one is especially morbid.
Marian Wang, a reporter for Nation for Change, wrote an excellent article about a grieving father and his struggles to pay his dead son’s student loans (http://www.nationofchange.org/grieving-father-struggles-pay-dead-son-s-student-loans-1339769156). Wang reported that a few months after he buried his son, ‘Freddy’ (who was tragically killed in an auto accident), Francisco Reynoso began receiving notices in the mail from creditors eager to get their hands on a commission for collecting defaulted student loans. Letters were not enough so then the debt collectors became more ruthless, calling Mr. Reynoso on the phone in his time of grief with clockwork regularity. These merciless debt collectors are reminiscent of the for-profit college recruiters who sit in boiler rooms, lying and prevaricating to gather money for their paymasters. They are part of the ‘hustling culture’ that is commercialized America.
I wrote about one of these collection agencies in charge of collecting student loans at Daily Censored called ‘Allied Interstate, Inc.’ (http://www.dailycensored.com/2012/05/16/obama-sues-students-in-default-on-educational-loans-taxpayers-pick-up-the-tab-and-for-profit-colleges-pocket-the-government-swag/). Allied Interstate Inc. is questionable in and of itself, as readers can see in the article. It is the type of business one would go into if they were in the Mafia and wanted a legal storefront. In fact, these debt collection rackets are more vicious than the predatory consumer culture that spawned them and more implacable than a fox trying to escape a pack of fox hounds.
By law, debt collectors must go through a debtor’s attorney if one has been hired. Even though Reynoso hired an attorney, he told Wang that the collectors could care less about the law and they continued to call him every day, in fact often several times a day, for about a year and a half. Reynoso told Wang:
“I would tell them to call the lawyer. And they would still say, The lawyer doesn’t owe us. You’re the one who owes us. You’re the one who has to pay us. We don’t care what happened with your son, you have to pay us” (ibid).
This is illegal harassment virtually made legal by a lack of regulation or prosecution of these carnivorous firms by State Attorney Generals or federal authorities. The AG’s or the feds either lack the interest, foresight, staff and/or ability to call these vulture collectors to the carpet for their vicious tactics and so the boiler rooms grow larger as the debt spins out of control and for those who lose loved ones who owe student loans, only sadistic harassment and cruel threats await them.
Co-signing for debt puts you on the hook for life
The problem is that Reynoso co-signed for his son’s student loans making him legally liable for the debts if his son couldn’t or wouldn’t pay, i.e. default. Reynoso is a humble gardener in Los Angeles that made just over $21,000 in 2011, according to his tax returns as reported by Wang. Mr. Reynoso is originally from Mexico and his son would have been the first to go to college and graduate in his family. Freddy attended Berklee College of Music, for which he was forced to borrow to attend and pay the costs of tuition and fees. Mr. Reynoso had no idea of the obligations he was taking on when he co-signed his son’s loan; he only knew that he was proud of his son and happy that he was in college. Little did he know that his son’s life had been commodified and securitized under the rubric of financialization which now accounts for over 68% of the economy in the US (http://monthlyreview.org/2012/05/01/the-endless-crisis).
The horror of the financialization of education
Reynoso’s story is horrific and Wang tells it with touching empathy for a grieving father that has lost a son and inherited a gaggle of socio-paths. But as Wang notes, the financialization of the Student Loan Asset Backed Securities (SLABS) is the real story behind the morbid tale of personal tragedy for it points to the growing financialization of education and fraud on Wall Street and points directly to the next economic time bomb ready to catapult an already dismal economy into further peonage and never ending crisis (http://www.projectcensored.org/top-stories/articles/the-financialization-of-education-and-sonoma-state-university-part-ii/).
The student loan debt, or the aggregate amount of debt that students currently owe, is now said to be over one trillion but as reported in N+1 Magazine on-line back in April of 2011, this amount has mushroomed to $2.67 trillion at its apex (http://nplusonemag.com/bad-education). There is really no way to tell exactly how much is owed by students for loans they have taken out to attend often predatory colleges but one thing we do know for sure: with the economy teetering on the brink of further depression most of it will not be paid back. Default rates are currently running at 40-50%. This means that taxpayers will be on the hook for a large part of the loans, the federal ones that is, and the loved ones of lost sons and daughters can be forced to pay the debt incurred by family members even if it means garnishing their social security checks well into their senior years.
As long time activist, teacher and educational writer, Steve Miller, stated so well at a recent conference on the privatization of higher education held in San Francisco on May 15, 2012:
“Financialization leads to crime.”
We will see just how right Steve is as the story unfolds and the personal horror faced by Mr. Reynoso is seated within the context of capitalism, iself a criminal syndicate, which generates an ever greater need to financialize the economy.
Student Loan Asset Backed Securities (SLABS)
Student loans are a prime example of financialization through debt. With no jobs awaiting them when they graduate college, student loan debt is not even serviceable, let alone payable (The Bureau of Labor recently reported that only 54.3 percent of adults 18-24 are employed, making it the lowest level of employment since the government began tracking data in 1948).
The financialization of the student loan debt occurs when student loan debt is transformed into asset-backed securities (ABS). The value and income payments from the ABS’s are ‘collateralized’ (“backed”) by a specified pool of underlying assets. None of the ABS can be sold individually. This is why they are sold to large institutional investors. By ‘pooling’ the assets into ABS, this allows them to be sold to general institutional investors. This process is called securitization.
Securitization allows the risk of investing in the underlying assets (ABS) to be diversified because each security will represent only a fraction of the total value of the diverse pool of underlying assets. Asset Backed Securities can include payments from credit cards, auto loans, mortgage loans, royalty payments and even movie revenues (everything is financialized). As the reader can see, ABS’s are the origin of the sub-prime mortgage fiasco. Like the sub-prime mortgage loans, there is nothing backing the ABS’s except promises to pay. When the bridge goes down as it did with the sub-prime mortgages, all the ABS that reflect sub-prime mortgages go down as well. The same will happen with student loan debt.
Student Loan Asset Backed Securities (SLABS) are a major sector of the ABS market. There are more than $400 billion in assets backing various student loan deals that are issued in the market. SLABS, like the sub-prime loans, are traditionally a favorite for fixed income investors. This is owed to their high credit quality (as stamped by the crediting agencies like Moodys) and low volatility. SLABS are now institutionalized as well; they form a regular fixture in all the major institutional investors’ portfolios.
Now that student loan debt has reached a milestone — reported at $1 trillion on April 25, 2012, many investors realize there are many other variables, which affect the timing and realization of cash flows of student loan securities. One such factor that was not accounted for when investors originally invested in SLABS is the massive student default rates that are sweeping the country. This coupled with bleak employment opportunities have forecasters already talking about the next financial bubble to burst.
Many financial investment firms even capitalize on what could be future crisis by boasting investment tools for determining the risk of a SLAB and managing them as investments (http://www.educationinvestmentgroup.com/).
At the same time massive debt and high levels of unemployment constitute the landscape of student lives, advertising, selling, buying and managing this debt continues to hold out great promise and profits for the financial institutions involved in dicing them up into little pieces, scattering them with other ABS and selling them. And as for profit — students are paying 6.8 percent, all good news for the banks that hold the paper and that pay less than one percent to depositors(http://www.washingtonpost.com/business/economy/durbin-targets-private-student-loan-defaults/2012/03/20/gIQA3mtFQS_story.html).
The beauty of the SLABS for investors, if they are federal loans, is that since the debt is non-dischargeable in bankruptcy court, the financial institutions and holders of the SLAB have nothing to worry about; they get paid by taxpayers if students default — a form of direct subsidy or what is referred to as “socialism for the rich”.
Some history regarding SLABS
According to N+1, an on-line news outlet:
“During the expansion of the housing bubble, lenders felt protected because they could repackage risky loans as mortgage-backed securities, which sold briskly to a pious market that believed housing prices could only increase. By combining slices of regionally diverse loans and theoretically spreading the risk of default, lenders were able to convince independent rating agencies that the resulting financial products were safe bets. They weren’t. But since this wouldn’t be America if you couldn’t monetize your children’s futures, the education sector still has its equivalent: the Student Loan Asset-Backed Security (or, as they’re known in the industry, SLABS).
SLABS were invented by then-semi-public Sallie Mae in the early ’90s, and their trading grew as part of the larger asset-backed security wave that peaked in 2007. In 1990, there were $75.6 million of these securities in circulation; at their apex, the total stood at $2.67 trillion. The number of SLABS traded on the market grew from $200,000 in 1991 to near $250 billion by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50 percent or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments—the kind financial advisors market to pension funds and the elderly…” (ibid).
These SLABS, like the Mortgage Backed Asset Loans, or derivatives, or CDO’s that blew up and tanked the world economy are hardly safe investments but rather ticking time bombs of toxicity just waiting to go off. Worse, they are spread, like the CDO’s, mortgage backed securities and all the other toxic and junk financialization products created on Wall Street that they called “investments”, within economic portfolios that range from institutional investors, union pensions to private individuals — even cities, states, governments and whole countries.
Comparing the home foreclosure crisis with the future crisis of SLABS: Illegal economic practices put the economy in grave risk
Readers have no difficulty remembering the foreclosure crisis that hit America in 2008; this is due to the fact it never went away. As the New York Times wrote regarding the foreclosure process, debt and the legality of title and actual proof of ownership for foreclosure purposes:
“In late 2010, evidenced emerged that the foreclosure process may have been deeply tainted by sloppy recordkeeping, cut corners and possible fraud, epitomized by high-profile cases of “robo-signing’’ — cases in which foreclosures took place based on forged or un-reviewed documents. More than 40 states attorneys general began investigations into foreclosure abuse, and worries about the legal fallout from the scandal led to a sharp slowdown in the rate of foreclosure filings and of repossessions in 2011.
And a wide-ranging review by federal investigators found that managers at major banks ignored widespread errors in the foreclosure process, in some cases instructing employees to adopt make-believe titles and speed documents through the system despite internal objections” (http://topics.nytimes.com/top/reference/timestopics/subjects/f/foreclosures/index.html).
Even as far back as October of 2010, Washington Post Staff Writer, Ariana Eunjung Cha pointed out that:
“Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans. Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title” (http://www.washingtonpost.com/wp-dyn/content/discussion/2010/10/07/DI2010100702669.html).
And this is where the analogy to the SLABS begins to get one queasy about the future for the same shenanigans are at play here. As Wang indicates in her telling of the tragic story of Francisco Reynoso and his son Freddy, when Reynoso and his lawyer went to trace the student loans they found, much like homeowners that are or have faced foreclosure, that:
“ the loans are maddeningly opaque. Despite the help of a lawyer, Reynoso has not been able to determine exactly how much he owes, or even what company holds his loans. Just as happened with home mortgages in the boom years before the 2008 financial crash, his son’s student loans have been sold and resold, and at least one was likely bundled into a complex Wall Street security. But the trail of those transactions ends at a wall of corporate silence from companies that include two household names: banking giant UBS and Xerox, which owns the loan servicer handling the bulk of his loans. Left without answers is a bereaved father” (http://www.nationofchange.org/grieving-father-struggles-pay-dead-son-s-student-loans-1339769156).
The most remarkable feature of this story is that it illustrates that even with a lawyer Mr. Reynoso cannot figure out how much is owed on behalf of his son. This is the level of transparency and disclosure that awaits anyone trying to find out how much and who owns their debt. That he should have to shoulder the responsibility and cost of a lawyer at a time when he is grieving is gruesome enough, but the lack of transparency is right up there with the mortgages that were robo-signed and then snaked through the high grass of the “free market” without a slimy trace. This is all fraud and misrepresentation, but no one gets prosecuted. Why? It’s capitalism, how the system works.
The student loans and how they work
In the case of Francisco Reynoso’s son, Freddy, he took out three loans to subsidize his college education. One was a federal student loan that was immediately cancelled after his death. That’s because the federal government cancels student loans if a student dies.
However, the majority of Freddy’s loans were not federal loans, but private student loans. These loans compel higher interest rates and those that lend them operate with fewer consumer protections and regulations. Sound like the sub-prime mortgage scandal? The analogy is maddening all with the usual suspects.
Only a few private student lenders offer debt discharges in the event of the borrower’s death. The lender really doesn’t care if the borrower dies or how s/he dies. Under capitalism, profits come before people so an ethic of empathy is simply not part of the fiduciary responsibility of banks or their collection agents; in fact morality hinders profit accumulation. So if a private lender or company decides to cancel a debt due to death, and this sometimes happens, it is not due to a matter of policy but is arbitrary and capricious and more owed to public relations than to compassion.
It seems that Freddy Reynoso’s private loans were originated by two companies. One was Bank of America and the other was Education Finance Partners. Neither company currently owns the loans. ProPublica has tried to find out who owns Freddy’s loans but evidently they could not. This is confusing. Perhaps the reason Propublica could not trace the debt is because much like the mortgage backed loans, the SLABS have been sliced, diced and scattered throughout the investment portfolios. One would think, however, that the collection agency which harasses Mr. Reynoso would have to disclose the name of the company, bank or lender that they were collecting for.
Either way, according to Wang here is how it works:
“First, the Bank of America loan: Almost as soon as Bank of America originated it, the loan was sold to a Boston-based company called First Marblehead, once one of the biggest securitizers of student loans. But nowhere in the paperwork sent to the Reynosos and reviewed by ProPublica does the name First Marblehead appear. Instead, the Reynosos have received paperwork emblazoned with the logo of National Collegiate Trust. That’s the name First Marblehead gave to bundles of loans that it turned into Wall Street securities and sold to investors. Was Freddy’s loan bundled into a security? And if so, who owns it now? First Marblehead has not returned repeated requests for comment” (ibid).
Education Finance Partners, the private student loan company that originated the largest portion of Freddy’s student debts, reached a $2.5 million settlement agreement with the New York Attorney General’s Office in 2007 to settle charges that it had paid colleges across the country to steer students toward its high-interest loans. And Berklee College of Music, Freddy’s alma mater, was one of the schools singled out in that investigation for accepting the improper payments. Berklee College of Music spokesman Allen Bush acknowledged in a statement to ProPublica that the school accepted a total of $23,000 from Education Finance Partners between 2005 and 2007, but said that “all of these funds were deposited into a financial aid account and disbursed through a need-based grant system to current Berklee students” (ibid).
Education Finance Partners literally left town and declared bankruptcy without admitting any culpability and not one person took the ‘perp’ walk. No doubt their CEO’s grabbed all they could before they cleared out their desks and surrendered their keys and sped out of the parking lot.
Who holds Freddy’s loans still, unbelievably, remains a mystery. Wang notes that the company’s archives — now kept by another bottom feeding, predator company called Loan Science — show that his loans were snatched up by the Swiss bank UBS in October 2008 (http://www.loanscience.com/). But the entire portfolio changed hands again in 2009.
In an e-mail sent to Wang by a UBS spokesman, she was told:
“That 2009 sale was private, it was bound by a confidentiality agreement and, therefore, we’re not in a position to disclose the identity of the purchaser” (ibid).
Yes, the non-disclosure or confidentiality agreements which are more often than not used to cover up crime, malfeasance and to keep the public in the dark about probable criminal and highly unethical actions are always in operation (http://truth-out.org/news/item/8579-unless-courts-use-power-to-block-nondisclosure-agreements-companies-like-the-washington-post-will-continue-to-silence-whistleblowers).
In trying to figure out who owns Freddy’s loans, Wang mentions that Freddy’s debt may have been among those acquired by the Swiss National Bank, Switzerland’s equivalent of the U.S. Federal Reserve, when it bailed out UBS (our sidebar.).
More incredible is that Reynoso and his lawyer don’t even know exactly how much he owes on his dead son’s student loans. It appears to be well into the six figures according to Wang, but the amount is still not known with any certainty.
The loan that Bank of America originated is now in the hands of First Marblehead, remember, the other collector? At the end of March, the balance was around $7,400, according to Mike Reiber, a spokesman for PHEAA (http://www.pheaa.org/), a company that once serviced that loan. Servicing loans is big business.
The other much larger portion of Reynoso’s debt remains cloudy and too difficult to trace with any reasonable certainty. A 2009 lending disclosure document indicates that through now defunct Education Finance Partners, UBS extended nearly $160,000 in credit to Freddy Reynoso and projected that if he made all payments as scheduled, the loan for his music education would end up costing him $279,000.
If this is not a crime, and it is not, it should be. What it is is carnivorous financialization and the fact that his alma mater was involved shows collusion and fraud between for-profit colleges and lenders. Readers can see the stearling growth of secondary predatory companies whose sole existence is mortgaged to debt and collecting it.
Evidently the only party who knows the details and is obligated to tell Reynoso about his son’s, now his, debt is the debt servicer, ACS Education Services (https://www.acs-education.com/CS/Jsp/general/home.jsp). They are another bottom feeding company, like vulture pawnbrokers or cash advance outfits that make money off of tragedy and servicing debt. They basically feed off defaulted student loans as if they were road kill.
ACS declined to disclose any specifics about the loans to ProPublica, citing ‘privacy reasons’, even though they had Reynoso’s full consent to disclose the information to Propublica. Weeks ago, Francisco Reynoso himself sent a letter to ACS asking who currently holds the loans; he has received no response as of yet.
Propublica also found that ACS is a subsidiary of the Xerox Corporation, so ProPublica put in several calls to Xerox to query them about the issues. Wang describes in her article that although they have been given more than a full week to respond as of this writing, Xerox’s corporate communications team has yet to provide a response to queries about when Reynoso can expect basic information about his son’s loans, including the amount he owes and the name of the company that now owns the debt (http://www.nationofchange.org/grieving-father-struggles-pay-dead-son-s-student-loans-1339769156).
It is obvious that the lack of disclosure and transparency is analogous to the robo-signing mortgage fiasco. The large banking interests and private investors involved do not want the problems associated with critical public scrutiny and they are fortunate they have a government that has been selected to assure they are not the subject of a granular examination. Banking practices are out of the purview of the public who is simply told that they are too big to fail and that they should continue to rely on these monstrous institutions and their Wall Street cohorts to run the country.
Reynoso shackled with debt for life
Even if one hires a lawyer in a situation like this their options are limited. That’s because unlike most types of debt, private student loans are not dischargeable through bankruptcy. In America there are three ‘crimes’ that are not subject to any statute of limitations: one is murder, the other is treason and the other is student loan debt. This is why educator and activist Steve Miller was right when he stated that financialization leads to crime. First of all financialization was once considered a crime (shylocking, usury, accounting gimmicks, etc.). Now, with unemployment the cornerstone of the American economy just to pay the debt many young people and even those in their middle ages are forced to engage in criminal activity such as drug dealing, prostitution or theft just to pay their student loans.
The bankruptcy code does have a clause called a hardship discharge for those filing for bankruptcy. The criteria for proving “undue hardship” is very high but what can constitute more undue hardship than the death of your beloved son as he was about to enter into adulthood?
Francisco Reynos’s fate now lies in the hands of a ‘bankruptcy’ judge. He could face a dire economic situation whereby his own Social Security, tax rebates, or wages will be garnished until all of the debt is paid back to whoever owns them. This could send Francisco Reynoso to an early grave like his son. It is unconscionable and all peddled as the American Dream when it is really the American Scheme.
As to the SLABS, they lie at the feet of all of us with probable deadly economic consequences as many if not most of the outstanding student loans slip into default. It looks like one job that might be open for students who cannot find work to pay scandalous loans for higher education is to work for one of the debt service corporations or collection agencies like the defunct Education Finance Partners or Allied Inc. These companies are set to grow in leaps and bounds now as unemployment rises and young people see a foreclosed economic future and a disposable life under capitalism. Hounding, threatening, and harassing other students and their impoverished relations who are tethered to debt is now big business.