Tag Archives: debt

Conservatives getting behind mortgage modifications?

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A journalist argues that conservatives are starting to argue that the federal government should step in and help homeowners stay in their homes:

Mortgage modifications have been a key pillar of the progressive response to the economic downturn–and they’ve been one focus of the Occupy protests that have sprung up across the country lately. The Obama administration offered its own such program in 2009, though it has helped far fewer homeowners than anticipated, thanks to a flawed design. But until lately, conservatives had by and large opposed the idea, arguing, as Santelli did, that taxpayers shouldn’t be forced to pay for borrowers’ bad decisions, and that banks shouldn’t have their actions constrained by government.

So what’s changed? By and large, policy hands and political leaders alike recognize that the economy isn’t going to get better on its own, at least not any time soon,. There’s a widespread consensus that until the United States tackles the massive overhang of housing debt–American homeowners’ wealth has fallen by a stunning 40 percent since 2006–the economic recovery won’t gain steam. As Feldstein wrote: “The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater.” Rogoff, too, views the crushing volume of personal debt as an unaffordable drag on growth. “Simply put, you can’t operate an economy where huge numbers of people are desperately in debt and have no real way out,” he argues.

Hubbard originally offered a modification plan in 2010 as a way to avoid another “costly stimulus package” designed to spur consumer demand. But he, too, may also recognize that mortgage modification, though necessary for the health of the economy, is likely to be politically unpopular. If so, better to have President Obama take the hit, rather than a future Republican president—like, say, President Romney.

Of course, right and left don’t see entirely eye-to-eye on the issue. Dean Baker, an economist with the liberal Center for Economic and Policy Research, last week slammed Feldstein’s plan as too soft on banks and a bad deal for struggling homeowners. And it’s hard to imagine that Republicans in Congress would react favorably to an aggressive mortgage modification proposal from the Obama administration.

So if this is true – and “three instances” doesn’t a trend make even as this journalist suggests – what is happening?

1. Conservatives are recognizing that the mortgage debt is holding up the larger economic recovery. If people can’t move, they can’t go to the open jobs. The debt doesn’t allow them to spend on other consumer items. If government involvement can move people past this logjam, then the “free market” can work again. Desperate times mean that political ideology has to be bent a little.

2. As the journalist suggests, they only back this when a Democrat is in charge.

3. This is pandering for votes. American culture has a dream of homeownership – neither party wants to be against that.

This bears watching. Of course, the devil is in the details: who is actually going to support what? Who is going to pay for this? How many homeowners could be helped?

Rising debt for college loans better than debt for a McMansion

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The college Class of 2011 might expect more in life than simply to be known as “the most indebted ever“:

22,900: Average student debt of newly minted college graduates

The Class of 2011 will graduate this spring from America’s colleges and universities with a dubious distinction: the most indebted ever.

Even as the average U.S. household pares down its debts, the new degree-holders who represent the country’s best hope for future prosperity are headed in the opposite direction. With tuition rising at an annual rate of about 5% and cash-strapped parents less able to help, the mean student-debt burden at graduation will reach nearly $18,000 this year, estimates Mark Kantrowitz, publisher of student-aid websites Fastweb.com and FinAid.org. Together with loans parents take on to finance their children’s college educations — loans that the students often pay themselves – the estimate comes to about $22,900. That’s 8% more than last year and, in inflation-adjusted terms, 47% more than a decade ago.

In the long run, the investment is probably worth it. Education is a much better reason to borrow money than buying cars or McMansions, and it endows people with economic advantages that the recession and slow recovery have only accentuated. As of 2009, the annual pre-tax income of households headed by people with at least a college degree exceeded that of less-educated households by 101%, up from 91% in 2006. As of April, the unemployment rate among college graduates stood at 4.5%, compared to 9.7% for those with only a high-school diploma and 14.6% for those who never finished high school.

I am intrigued by the McMansion comparison here as it is used to illustrate the foolishness of overspending on a big or expensive house versus the possible “good debt” of college loans. Of course, this is all in economic terms as the education is expected to pay off down the road while McMansion purchases of the last 15 years are not expected to yield such great values in this poor housing market. (And using a car as a debt comparison seems a bit strange: a car is rarely an investment but rather a black hole for money.) But this view of a house, as an investment opportunity, is a relatively recent development.

There is something about this data that could warrant a closer look: while it appears that the average college student debt has increased, is the average really the best measure here? I would much rather see a distribution of college debt in order to better know whether this mean is heavily influenced by people with massive amounts of college debt. Here is a paragraph from a recent New York Times article regarding college loans:

Two-thirds of bachelor’s degree recipients graduated with debt in 2008, compared with less than half in 1993. Last year, graduates who took out loans left college with an average of $24,000 in debt. Default rates are rising, especially among those who attended for-profit colleges.

And here is some additional data from recent years that sheds more light on the distribution of college debt:

These figures were calculated using the data analysis system for the 2007-2008 National Postsecondary Student Aid Study (NPSAS) conducted by the National Center for Education Statistics at the US Department of Education. (For comparison, cumulative education debt statistics from the 2003-2004 NPSAS are also available.) The 2007-2008 NPSAS surveyed 114,000 undergraduate students and 14,000 graduate and professional students. These statistics are not necessarily available from published NPSAS reports.The median cumulative debt among graduating Bachelor’s degree recipients at 4-year undergraduate schools was $19,999 in 2007-08. One quarter borrowed $30,526 or more, and one tenth borrowed $44,668 or more. 9.5% of undergraduate students and 14.6% of undergraduate student borrowers graduating with a Bachelor’s degree graduated with $40,000 or more in cumulative debt in 2007-08. This compares with 6.4% and 10.0%, respectively, for Bachelor’s degree recipients graduating with $40,000 or more (2008 dollars) in cumulative debt in 2003-04.

This data provides a median that is somewhat similar to the two figures cited above. Based on these three figures and interpretations, it sounds like more college students are taking on debt rather than some students are taking on a lot more debt.

China and default

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No, I’m not talking about the U.S. defaulting on the enormous amount of debt it owes to China.  I’m talking about the relatively small matter of $2.3 billion that a California district judge levied against China as a sovereign government for copyright infringement. As part of a default judgment, no less:

About a year after Cybersitter sued the Chinese government and several Asian OEMs for allegedly copying its code to create the “Green Dam” software, a U.S. federal judge has allowed the $2.3 billion suit to proceed.

Judge Josephine Staton Tucker, a California district judge, entered a judgement of default against the People’s Republic of China on Wednesday, after PRC officials failed to respond to the ruling. Although the PRC’s embassy sent a letter to the U.S. State Department protesting Cybersitter’s suit, such a letter did not qualify as a formal response.

The National Law Journal has additional coverage here.

My guess is that this suit is going to generate a lot of headlines and go absolutely nowhere (at least against China — the co-defendants may not be so lucky).  As a matter of law, China has a powerful argument for sovereign immunity, no matter what District Judge Josephine Tucker’s interpretation of the U.S.’ own Foreign Sovereign Immunities Act (FSIA) is.  And practically speaking, there’s pretty much no way that Cybersitter is going to be able to collect on this default judgment.  No doubt it will be tossed back and forth in official diplomatic communications for a while, but it’s quite doubtful that any money will ever change hands.  Unless, of course, one speaks of the money China will continue to pay the U.S. for Treasuries.

Oh wait…

The American Bar Association issues a financial warning for prospective law students

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The American Bar Association has issued a warning for perspective law students about the cost of obtaining a law degree:

According to the association, over the past 25 years law school tuition has consistently risen two times faster than inflation.

The average private law student borrows about $92,500 for law school, while law students who attend public schools take out loans for $71,400. These numbers do not include any debt law students may still have from their time as undergraduates.

Before the recession, the ABA cites statistics that show an average starting salary for an associate of a large law firm of about $160,000 a year. But by 2009, about 42 percent of graduates began with an annual salary of less than $65,000.

And those are just the newbies.

This is an interesting statement: a national organization warning students about the large amount of debt they will incur (and hinting at the lack of jobs to pay off this debt) for their own profession. What do law schools think about this? What sort of discussions took place before issuing this warning? How many complaints have come from people who did not know about the full cost of getting a law degree?

It would help to have some context regarding this statement. Is this the first time the ABA has issued something like this? How unusual is this across a variety of disciplines that require a professional or advanced degree? Are other organizations interested in issuing similar statements?

(Read the full statement here.)

h/t Instapundit

Colleges have debt too

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The New York Times has published an opinion piece by Mark C. Taylor, the chairman of the religion department at Columbia University, that puts a slightly different spin on the perennial college-costs-are-out-of-control argument.  He suggests that the institutions of higher education are themselves as indebted (and troubled) as their students:

There is a similarity between the debt crisis on Wall Street and what threatens higher education. Just as investors borrowed more and increased their leverage in volatile markets, many colleges and universities are borrowing more and betting on an expanding market in higher education at the precise moment their product is becoming affordable for fewer people.

It’s an interesting observation with potentially far-reaching implications.  There is always going to be demand for higher education, but it’s hard to see how a university like N.Y.U. can sustain debt levels higher than its endowment (“a staggering $2.22 billion debt with a relatively modest $2.2 billion endowment,” according to the article) in a world where “four years at a top-tier school will cost $330,000 in 2020, $525,000 in 2028 and $785,000 in 2035” if present trends continue.

How to file 3 lawsuits an hour

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The New York Times is reporting that the recession is causing a boom for some lawyers:

As millions of Americans have fallen behind on paying their bills, debt collection law firms have been clogging courtrooms with lawsuits seeking repayment.
Few have been as prolific as Cohen & Slamowitz, a Woodbury, N.Y., firm that has specialized in debt collection for nearly two decades. The firm has been filing roughly 80,000 lawsuits a year.
With just 14 lawyers on staff, that works out to more than 5,700 cases per lawyer.
While reporter Andrew Martin makes much of the shock value of the numbers and implies that there is no way such large-scale suing could be done responsibly, these numbers don’t strike me as inherently extreme.  While I am sure that abuse can and does happen in debt collection, consider the following:
  1. 5,700 cases per lawyer works out to just under 3 cases per billable hour (assuming a 2000-hour working year).
  2. Collecting a debt is not like proving that someone committed a crime.  It’s not like creditors have to prove to a jury that debtors owe money beyond a reasonable doubt.
  3. These lawyers are using automation software.
  4. These lawyers have a large support staff (who presumably handle most of the clerical work).