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Lending

Your student loan is tanking the mortgage market

Rising education debt spells doom for housing

January 21, 2014

The percentage of student loans classified as delinquent shot up by 13% in 2013, as other types of credit — auto, credit cards and mortgages — continued to see notable payment improvements, data from the Federal Reserve Bank of New York claims.

There’s only one conclusion that can be drawn from this – student loans are the new mortgages. Everyone under a certain age seems to have at least one education debt to pay off. And they are more expensive than ever as this debt sector expands to a tally of $1 trillion-plus in outstanding student loans.

With this expansion, comes fewer Americans who are financially stable or qualified enough to buy new or existing homes. But how troubling is the data, really?

It’s a trend the CFPB already highlighted last year. And while the market may want to believe these headwinds are temporal. Analysts in the structured finance space continue to see it as a real problem with potentially explosive outcomes.

What makes the issue appear worse on paper is the fact the government is backing much of this debt in a fashion eerily similar to its support of the housing market back in 2006 and 2007.

"The federal government is the risk-taker on the vast majority of student loans,” said Ron D’Vari, CEO of NewOak Capital. "Similar to the experience witnessed in the growth and risk-taking in the housing market, the rapid expansion of the student loan market, combined with the benefits afforded by government guarantees, is a source of concern. Regulators are on the lookout for abusive practices, with particular focus on student loan servicers and lenders working with for-profit colleges."

It's not just the government being on the hook that has D'Vari frightened. He also worries student debt levels have created "an indebted class of consumers" that will impact future buyers of cars and homes.

And it's not going away. In fact, D'Vari, who closely followed the housing crisis, says the Securities and Exchange Commission is shooting off subpoenas, while the Consumer Financial Protection Bureau is studying an apparent misalignment of incentives in the market.

D'Vari's take: "Follow the money because the next financial litigation battle is going to be an education about higher education."

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