NEW YORK (MainStreet) — Depending on which people you talk to, the financial crisis is over. And—-depending on your sources—-the blame was largely due to the over-heated demand for residential mortgages and their subsequent securitization.
Could another debt market touch off a replay of the last crisis? How about student loans?
The Consumer Financial Protection Bureau went public with the idea on Monday when Rohit Chopra, the CFPB's student loan ombudsman, warned financial regulators against turning a blind eye to a crisis that could imperil the entire country.
In prepared remarks delivered in a speech to the Federal Reserve Bank of St. Louis on Monday, Chopra said it would be "irresponsible" for financial regulators to look the other way while a calamity is in the making caused by student loans. The current student loan market is worth roughly $1.2 trillion, with some 40 million Americans having loan balances worth an average of about $30,000 each.
Chopra said regulators had various options that didn't need Congressional assent-- including requiring lenders to disclose more data to forecast the growth of the problem and initiating policies that encourage the refinancing of student loans.
"We must resist the temptation to address these concerns solely through an education policy lens," said Chropa, "when, in fact, they may require very significant attention from financial regulators and the financial services industry." He added, "Congress enacted a wide range of reforms to the mortgage market and they may shed light on options to address the significant structural deficiencies in the student loan market."
Congress is also pre-occupied with the health insurance fiasco while it contemplates another debt limit showdown in 2014. Sequester cuts are also on tap—and will eat into money available to the nation's college students, which won't inspire them to borrow less.
Like the mortgage market, Chopra said he is also worried about the lack of incentive for servicers to offer loan modifications to struggling borrowers.
"Outstanding student loan debt has doubled since 2007," Chopra said. "Rising student debt burdens may prove to be one of the more striking aftershocks of the Great Recession." Real wages for people who have recently left school and what they owe on their student loans are moving in opposite directions. Loan balances are going up. Real wages are going down.
Chopra suggested having institutions that securitize student loans in the secondary market hold 5% of the risk — perhaps inspired by the risk-retention mandates for securitized mortgages in the 2010 Dodd-Frank Act. The problem is that the securitized market for student loans barely has a pulse. He also wants lenders to make a "good faith effort" to loan to people who are likely able to repay as opposed to those who can't—-shades of the CFPB mandates for the mortgage market.
The good news is that policy makers may finally be paying attention to the impact student loans are having on the broader economy.
"I believe the talk Chopra gave was requested by the Federal Reserve Bank of St. Louis, specifically to seek advice for steps to be taken by the Federal Reserve," said Mark Kantrowitz, founder of FinAid.org and publisher of Edvisors Network, a group of Websites that provide intelligence on student loans. "So it was the Federal Reserve bank that initiated it, probably due to concern about the impact of student loan debt on household formation."
The Federal Reserve, he said, has been more active on this topic once it became clear that student loan debt is a growing macroeconomic factor.
--Written by John Sandman for MainStreet