Image Source: Pixabay
 

This MarketWatch article, More people are late on both their mortgage and student-loan payments – another bad sign for the economy got my attention. Let’s start with student loans:

“Student-loan delinquencies are rising sharply, as are delinquencies on mortgages backed by the Federal Housing Administration….

New York Fed’s data indicate that one-tenth of student-loan debt was reported as seriously delinquent…meaning those borrowers were 90 days past due on payments.”

The Fed reports total student loan debt is $1.64 trillion – 10.2% (over $164 billion) is reported as 90 days delinquent.

On FHA mortgages:

“The analysis also shows even though FHA mortgages — typically used by first-time and lower-income buyers — only make up about 12% of mortgage balances, the delinquency rate on those loans has been the steepest. Nearly 40% of borrowers with an FHA loan had missed a single payment — higher than the share of FHA borrowers who did so before the pandemic….

…. Jake Krimmel, a senior economist at Realtor.com, said that he’s more worried about the increase in delinquencies among homeowners who have an FHA-backed mortgage. …. They’re over four times more likely than non-FHA loans to fall into delinquency, he told MarketWatch.

…. The share of homeowners who are underwater on their mortgages — meaning that they owe more on their mortgage balance than what their home would sell for in the current market — has been growing recently.”

Who gets stuck when the music stops?

Investopedia explains Who Actually Owns Student Loan Debt?:

• Student loans in the U.S. are generally either owned by the federal government or financial institutions.
• Almost all student loans are fully guaranteed by the government, so banks can sell them for a higher price because default risk is not transferred with the asset.

Wells Fargo explains FHA loans:

• FHA loans are insured by the U.S. Federal Housing Administration (FHA), which allows lenders to offer them to borrowers who might not qualify for other loan types.
• FHA loans require you to pay mortgage insurance premiums (MIP). These include an upfront fee as well as ongoing premiums that are added to your monthly payments.
• FHA loans offer down payments as low as 3.5%, which makes them a great choice for first-time homebuyers, or anyone who is buying a home on a budget.
• Flexible guidelines may help you qualify even with a lower income or credit score.
• You can refinance your FHA loan through a streamlined process, with no appraisal, credit check, or income verification.

Government insured means taxpayers assume default risk…

This is a result of government social engineering and market interference.

President Clinton wanted to make home ownership available to low-income earners. Banks were required to lend a certain percentage of their mortgages to risky, low-income buyers. If they didn’t meet their quotas, they could lose their banking charters.

Defaults rose; banks quickly began complaining. Holding too many risky loans would put them out of business. The government authorized Fannie Mae and Freddy Mac, to buy those loans from the banks – taxpayers assumed the default risk!

Lenders, making big, quick profits on loan origination fees, no longer cared about the creditworthiness of the borrower. That opened the floodgates. Poor credit? No problem; step right up and get your mortgage! The mortgages were sold, transferring the risk to others – many times government agencies.

As we saw in 2008, this created a temporary boom until delinquencies caused the system to fall apart. The movie, The Big Short outlined how corrupt the entire system was (and continues to be). In addition to backstopping the bad loans, the government bailed out the casino-banks (“Too big to fail!”).
 

In 2008, the Fed cut interest rates to historic lows and started the process all over again. It took a few years until low-interest-rate mortgages spurred the housing market and prices skyrocketed.

During the 2019 pandemic, rates were cut to zero, the system was flooded with money – resulting in the inevitable inflation:
 

Inflation was ignored for far too long – until finally the Fed was forced to raise rates as it was spiraling out of control.

Oops! Higher interest rates negatively affect the real estate market. Housing inventory is rising and prices are falling. Many who bought at the top of the market (3.5% down payment??) now owe more on their mortgage than their house is worth.

To add fuel to the fire, the Covid moratorium on student loan debt has been lifted, putting additional pressure on the family budget. You borrow – you owe. Time to pay up!

Meanwhile…

There is much hoopla about replacing Jerome Powell as Fed chairman. Treasury Secretary Scott Bessent’s champions a “fundamental reset” of financial regulations:

“Bank regulators should review outdated capital requirements that place ‘unnecessary burdens on financial institutions’ and reduce bank lending.

…. He believes that bank regulators should consider scrapping the dual-requirement structure.

…. ‘We cannot give only large banks the benefit of these reduced requirements, as actually contemplated by the last administration.'”

Will We Ever Learn?

Most every banking crisis follows a period of easy money, banks taking on excess risk, borrowers default creating a political emergency followed by government bailouts at taxpayer expense. Looser bank regulations will continue to fuel the cycle.

Sylvia Demarest explains “How the closing of S&Ls and small banks destroyed competition and contributed to the crisis of housing affordability in the US.”

“The cost of housing in the US has been outpacing both inflation and incomes for decades.

…. For decades local entrepreneurs used local banks to enter the home building business. …. After the 1990’s, as the banking industry consolidated, S&Ls and small banks closed, and the mom and pops lost access to capital.

…. They were replaced by large Wall Street institutions who managed access to capital for large businesses, not only in the US but internationally.

…. The policy response to the COVID crisis spiked inflation and increased housing cost. The Federal Reserve’s rapid increase of interest rates, beginning in December of 2021, increased both mortgage rates and the cost of capital to home builders.

…. Putting all this together; the cost of buying a home has more than quadrupled, while median incomes have stagnated.

…. The only way to reverse these trends and increase both competition and housing affordability is to increase access to capital for small business by 1) reconstituting the S&L industry, and 2) by dramatically increasing the number of local banks. This reversal of trend will have to include vigorous anti-trust enforcement….”

USA Facts runs the numbers:

“Over the last four decades, the number of FDIC-insured commercial banks has fallen by more than 70%.
 

…. However, even after the industry stabilized, the number of US banks continued to decline. However, this is due less to bank failures than the increasingly commonplace practice of bank mergers.”

Bank consolidation has led to “too big to fail,” banks, with the top 5 banks controlling over half the total banking assets. These casino bank investment arms are taking high risks. The “commercial bank” mantra is window dressing to become FDIC insured; which means taxpayers backstop their losses. They have little concern for mom and pop.

Statista reports:

“As of 2024, the pre-tax net operating income of FDIC-insured commercial banks in the United States amounted to approximately 324.54 billion U.S. dollars, an increase compared to the previous year.”
 

Don’t be fooled!

The Federal Reserve is owned by member banks, and their unspoken mission is protecting their profits. Federal Reserve governor Michelle Bowman is looking at “Three interest rate cuts this year given concerns about the strength of the job market and the overall US economy.” Delays in cutting rates could “result in a deterioration in labor market conditions and a further slowing in economic growth.”

Cutting interest rates, changing the Fed Chairman (with much fanfare) won’t solve the boom-bust cycle. It will just continue the process. It will take a lot more than tweaking rates to “Make America Great Again!”

Much to the delight of politicos, the banking industry spends hundreds of millions “lobbying” Congress, benefitting both financially. Will Congress ever step up and do what is right?

Aggressively use anti-trust laws to break up the big banks. No bank should be “too big to fail.” The big banks must be broken up.

More banks increase competition. Interest rates should be set by the market, not the government. During the Glass-Steagall era, banks made their money prudently lending in their local community. Today, half the banking assets vest in five casino banks that have little concern for the consumer. The old way worked better! Time for trust busting and more local banks.

Glass-Steagall must be reinstated. Banks are using FDIC protection to backstop huge investment risks. When they win, they keep the profits. When they lose, taxpayers bail them out.

The government must get out of the loan and loan guarantee business. When loans are originated by those who make an instant profit, with no concern about buyer default, the system is deemed to fail. Local community banks, concerned about buyer creditworthiness, were more responsible with their lending practices.

What do student loans and FHA mortgages have in common?

They are government programs with “good intentions,” which eventually is costing taxpayers billions.

Daniel Webster warned, “The Constitution was made to guard the people against the dangers of good intentions.”

Playing games with the Fed chair and interest rates will just continue the boom-bust cycle, with each successive crisis being worse than the one before. We need major bank reform where lenders suffer the consequences of bad decisions, not taxpayers! We can do better….
 

On The Lighter Side…

Fall is just around the corner; football season is beginning; we’re heading into the final turn of 2025. Between baseball and football, I’d guess on the weekends, many sports fans have two television sets on, side by side.

Here in Indiana, the corn and soybeans are getting ready for harvest. It looks like a bumper crop this year. The beautiful fields will soon be a beehive of activity with trucks and combines working long hours. With crops “in the bin” the landscape changes to hundreds of acres of dirt over the winter until the process starts anew in the spring. I love this part of the year in the Midwest. It’s the winter, when the dirt is hard and frozen, that I don’t enjoy. If God meant for me to be cold, I’d have more fur!

Since our move, we are in the process of getting 10 different new doctors. We’ve come a long way from the family doctor who does most everything.

Things feel different here; more like family. We met our new internal medicine doctor and it took about two minutes to realize he and his father were tenant farmers on the farm that had been in Jo’s family for almost a century. That led to a five-minute discussion catching up on old friends and times. Some of the new doctors’ children are classmates of our grandchildren, leading to more friendly discussions. They talk with you, not the computer screen….

Quote of the Week…

“One simple rule to follow: Determine what is best for the government and know that is what the powers are working to make happen. Inflation is what is best for a government, inflation with enormous debt.”

— Ayn Rand

And Finally…

Friend Chuck Butler shares some “Things You Learn if You Live Long Enough!” for our enjoyment:

• Being a little older, I am very fortunate to have someone call and check on me every day. He is from India and is very concerned about my car warranty.
• I choked on a carrot this morning, and all I could think of was, “I’ll bet a doughnut wouldn’t have done this to me.”
• Nothing spoils a good story more than the arrival of an eyewitness. (Mark Twain)
• I finally realize why I look so bad in pictures. It’s my face.
• It only takes one slow-walking person in the grocery store to destroy the illusion that I’m a nice person.
• Sorry that I’m late. I got here as soon as I wanted to!
• It turns out that when asked who your favorite child is, you’re supposed to pick out one of your own. I know that now.
• It’s fine to eat a test grape in the produce section, but you take one bite of a rotisserie chicken and it’s all, “Sir, you need to leave!”
• One thing no one ever talks about, when it comes to being an older adult, is how much time we devote to keeping a cardboard box because it is, you know, a really good box.
• I told my physical therapist that I broke my arm in two (2) places. He said to stop going to those places.
• Instead of cleaning my house, I just watch an episode of “The Hoarders,” and think, “Wow! My house looks great.”

And my favorite:

• Never trust an electrician with no eyebrows.

Until next time…

---

More By This Author:

Can You Grow Your Way Out Of Debt And Reach Prosperity?
In Times Of Uncertainty, Some Things Are Certain! One Man’s Opinion….
European Union On The Brink?