A friend of mine used to be the CEO of a commercial bank, and he tells stories about having to fire loan officers who made too many bad loans that did not get paid back.
That is how all banks operate, as bad loans mean large losses for the bank.
Problems arise, however, when lenders are able to make loans without having to worry about getting paid back.
This is what happened prior to the 2008 financial crisis – when lenders were able to sell bad loans to other investors without worrying about repercussions. Something similar has been taking place in China too over the last 15 years – fostering what is likely the largest real estate crisis in history.
And we saw this play out in spades in 2010 when the federal government took over the entire government-backed student loan industry.
To be clear, the government has been involved with student loans since the mid-1960s, but it just expanded its role and the availability of student loans over the years – with 2010 representing the final and complete takeover.
Now, a whopping 43 million Americans have student loan debt! They owe almost $1.8 trillion in total, with $1.6 trillion owed in federally-backed student loans. (Not coincidentally, college tuition costs skyrocketed in conjunction with the ability for students to borrow more and more without proving they could repay.)
But here’s the scary part – 10 million of those borrowers are in forbearance (payments put on hold), and 7 million are delinquent.
The government recently announced that it is going to start collecting from delinquent borrowers and work to end the forbearance programs (currently blocked by courts).
Borrowers in default will have tax refunds withheld or applied to delinquent balances and could even see wages garnished.
Credit reports will also be more likely to reflect adverse student loan payment histories or delinquencies.
In addition, FHA, VA, and USDA loan fundings will be held up if federal student balances are delinquent.
What this means is that we can all expect to see a lot of buyers and borrowers stymied by student loan balances issues in the coming months and years – much like we saw repeatedly after the 2008 financial crisis.
Oil Prices Hit Record Low
Oil prices dropped to $56 per barrel this morning – levels not seen since the depths of the COVID crisis. This is shocking because oil was as high as $120 per barrel in 2022, and because we have seen significant inflation since COVID (so $56 today is equivalent to $45 in 2020).
This makes it likely that we will see much lower inflation numbers in the future, and it implies that the world economy is very sluggish. And that implies much lower interest rates on the horizon.
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