Student Loan Crisis Looms

*Student Loan Crisis Looms*
**By George Yacik**

NEW-GeorgeY***A few weeks ago in my initial column for Progress in Lending I talked about the coming crash in mortgage industry production, mainly due to the drop in refinances, which could last for many years. But the prognosis for purchase mortgages isn’t terribly optimistic either – in fact, it’s positively scary.

****Many people are calling the burgeoning mountain of bad student loans the “next” giant U.S. loan crisis. But it could have a huge impact on the previous crisis, mortgage lending, which still has yet to heal fully.

****Most everyone probably knows by now, either personally or through the media, about how oppressive the student loan debt burden has become and how sky-high default rates are on student loans.

****According to the Federal Reserve Bank of New York ­– which has done some great work on this subject – student loan debt now totals close to $1 trillion, triple what it was just eight years ago. At the same time, more people owe money on student loans: More than 40% of 25-year-olds had student debt at the end of 2012, up from just 25% in 2003. Plus they owe a lot more:  the average student loan balance among 25-year-olds with student debt nearly doubled over that time, to $20,326 in 2012 from $10,649 in 2003.

****The number of borrowers delinquent on their student loan payments has also jumped sharply, to numbers incomprehensible to most people, let alone mortgage lenders. More than a third of people under 30 who have student loans were at least 90 days late on their payments at the end of last year. And that doesn’t even include the 44% of borrowers who are still in school and aren’t yet required to make payments, meaning the delinquency numbers would be even worse, since most students still in school don’t have jobs.

****With depressing numbers like these, you wonder how many young people are going to be able to have the money to buy a home in the future, or be able to qualify for a mortgage. If you graduate from college with $50,000 in debt, who’s going to lend you money to buy a house, when you can’t even pay your student loan?

****Not too long ago, having student loans used to be a good thing, as far as getting a mortgage was concerned. But that idea has been turned upside down since the Great Recession.

****According to the New York Fed, between 2003 and 2009, homeownership rates for 30-year-olds with a history of student debt were significantly higher than for those without student loans. It’s not hard to see why: “Student debt holders have higher levels of education on average and, hence, higher incomes,” the study says. “These more educated consumers are more likely to buy homes.”

****“However, this relationship changed dramatically during the recession,” the report continues. Homeownership rates for both groups fell, but the decline among people with student loans was twice as severe. “By 2012, the homeownership rate for student debtors was almost two percentage points lower than that of nonstudent debtors (my emphasis). Now, for the first time in at least 10 years, 30-year-olds with no history of student loansare more likely to have home-secured debt than those with a history of student loans.”

****A big reason why, of course, is that people with student loans are finding it a lot harder to qualify for a mortgage. “Consumers with substantial student debt may not be able to meet the stricter debt to income (DTI) ratio standards that are now being applied by lenders,” the study says.

****Moreover, student loan borrowers have lower credit scores than people without student loans. “By 2012, the average credit score for 25-year-old non-borrowers is 15 points above that for student borrowers, and the average score for 30-year-old non-borrowers is 24 points above that for student borrowers.”

****“As a result of tighter underwriting standards, higher delinquency rates, and lower credit scores, consumers with educational debt may have more limited access to housing and auto debt and, as a result, more limited options in the housing and vehicle markets, despite their comparatively high earning potential,” the study concludes. “While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace.”

****I’m sure you’ll agree this is a truly depressing scenario. I think it’s safe to say that, if nothing else, the mortgage lending business will be a lot riskier – and a lot smaller – than it used to be in the pre-bubble days, even than it is now. In the best case scenario, the homebuyer and mortgage borrower of the future will be less educated than he used to be and earn less money. In the worst case scenario, far fewer people, college-educated or not, will be able to afford to buy homes and be able to quality for a loan even if they can afford it.