Fannie Mae and Freddie Mac problems: Implications for Sallie Mae?

Parent Cafe
1

<p>I am starting this thread here, in Parents Forum, rather than in Financial Aid & Scholarships, because I am soliciting a basic explanation (and general discussion) of current financial events.</p>

<p>I have been keeping an eye and ear on the recent news about Fannie Mae and Freddie Mac. I am concerned that the financial problems faced by these two institutions will next affect Sallie Mae, which would have a significant negative impact upon higher education. My family needs to develop a financial strategy for keeping our daughter (who qualifies for subsidized Stafford and Perkins student loans) in college, should the institutions providing her student loans falter or fail. My understanding of the current financial situation, and its possible implications for Sallie Mae, and for colleges and college students, is inadequate. I don't understand it, and I need a plain language explanation. </p>

<p>I critique information communicated by the mass media, and I never unquestioningly accept everything I see, hear, and read. I can easily distinguish fact from opinion when I am familiar with the subject matter at issue. However, I am unfamiliar with this subject matter. A lot of what I see, hear, and read about the financial situation is conflicting--so conflicting that it defies logic and common sense. Some financial experts say, "It's not as bad as people think." Other financial experts say, "It's much worse than people think." I don’t know what to think. </p>

<p>I have been working to educate myself about this financial situation, but I'm having a tough time. I'm no slouch at doing research, but for me, this is like researching information communicated entirely in an obscure foreign language. Banking and finance principles confound me, and the definitions of basic banking and finance terms confuse me, as well. Economics is not my forte, and--given that I have never earned, inherited, or otherwise had access to enough money or property to own investments of any kind--I have no personal experience with complex banking and finance matters. </p>

<p>I have no political or ideological axe to grind with regard to how or by whom this financial situation was created (I'm sure there's plenty of blame to go around), and I know there are differing opinions about which major political party is better able to turn this situation around. Right now, however, I need facts more than I need opinions (although I welcome all opinions). I need a plain language explanation of this financial situation. I especially need to know the possible financial implications for Sallie Mae, and for colleges and college students, particularly those students for whom access to federal (subsidized and unsubsidized) guaranteed student loans means the difference between affording college and not affording college.</p>

<p>I have no problem admitting when I don't know something, so feel free to make your explanation as simplistic--and understandable--as possible. You won't be "talking down" to me, because my grasp of this subject matter is already about as low as it can go.</p>

<p>Thank you.</p>

2

<p>[Direct</a> Loan Home Page](<a href=“http://www.ed.gov/offices/OSFAP/DirectLoan/index.html]Direct”>http://www.ed.gov/offices/OSFAP/DirectLoan/index.html)</p>

3

<p>I have one advice based on our experience. Even if you feel strongly that you are not eligible for need based FA, still file FASFA and play by all other rules at your school. It pays off, even though it might not make any logical sense of doing it. IT IS NOT waste of time. D’s college strongly advised us to file FASFA for MERIT scholarships, it paid off in our case. In addition, make sure that while in college, kids apply to everything that has emailed to them by college. When shool emailed D. at the end of her freshman year about returning student scholarships, she applied to every single one. She mentioned to us that most kids do not apply, considering it waste of time. IT IS NOT. She got considerable additional Merit Scholarship for next year.</p>

<p>We did not apply to loans, I do not have any experience with that. Because of what I mentioned above and because of D. high GPA, we are paying half of what we paid for her private HS.<br>
Sorry for not answering your question.</p>

4

<p>Keep it simple. </p>

<p>Basically the President thru his Adminstration and restricted Regulators promoted Growth thru deficit spending and tax cuts and belief that free and low regulatory oversight will solve many problems. </p>

<p>Contrast this to a family where the parents let their kids do anything they want in the belief the peer pressure will regulate the behavior of their kids. </p>

<p>Common Sense is not distributed equally or was it applied at the right time and place. Idiocy Ruled.</p>

<p>I suggest reading the Foundation trilogy by Isacc Asimov. Quick read.</p>

5

<p>For an education, I’d suggest reading Doug Noland’s Credit Bubble Bulletin going back to 2000. [Credit</a> Bubble Bulletin](<a href=“http://www.prudentbear.com/index.php/CreditBubbleArchive]Credit”>http://www.prudentbear.com/index.php/CreditBubbleArchive)</p>

<p>It’s a lot of reading but he does cover a lot of basic territory.</p>

<p>The thing about Fannie and Freddie is that their paper is all over the place (one of my money market funds is 15% Freddie/Fannie) and failure would create problems with the banking system. Adding to the problems of Freddie and Fannie was the IndyMac bank failure on Friday afternoon. There are about a billion in uninsured deposits and it looks like depositors will lose about half that amount. Costs to FDIC are estimated at $4B to $8B. There is $53B in the insurance fund. So we could have a problem if this spreads to other banks.</p>

6

<p>To LongPrime and BCEagle91: Thank you for your responses, explanations, and information links. I will check out the information sources you have suggested.</p>

<p>To MiamiDAP: Thank you for your response and advice. Every bit of advice helps.</p>

<p>These responses are a good start.</p>

7

<p>You may find this of interest: </p>

<p><a href=“http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=1&hp&oref=slogin[/url]”>http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=1&hp&oref=slogin&lt;/a&gt;&lt;/p&gt;

8

<p>The bad news: FNMA and FRMC are in trouble, and SLMA has a similar structure to theirs’.</p>

<p>The good news: FNMA and FRMC are in trouble because of losses on residential real estate, and SLMA doesn’t hold interests in residential real estate.</p>

<p>The bad news: But lots of the borrowers under loans SLMA owns are exposed to real estate losses, and that could (will) lead to increased defaults on student loans and increased losses on the defaults. So Sallie isn’t home free, although it isn’t front-line in the mortgage melt-down.</p>

<p>The good news: The government is bailing out Fannie and Freddie.</p>

<p>The bad news: The blowback from this bailout may make it difficult to do future bailouts, even though Sallie is remarkably similar in structure and status. Also, Sallie is much smaller, so the need for a bailout is less compelling.</p>

<p>The good news: Fannie and Freddie debtholders are going to be OK, which should give confidence to Sallie debtholders.</p>

<p>The bad news: It’s not clear whether Fannie and Freddie stockholders are going to be OK, which could make it darn hard for Sallie to raise new equity capital.</p>

<p>The good news: Sallie stock has lost a third of its value in the past three weeks, but it had not gotten further trashed by news of this bailout. It opened well above Friday’s close, and has retreated from that, but not much below where it was on Friday.</p>

9

<p>It’s been pretty clear that shareholders of FNM and FRE are not going to be okay given Paulson’s comments.</p>

<p>I think that Sallie Mae is in much better shape given the difficulty of discharging student loans. They can leave loans on their books forever, and add fines making it look like they are generating revenue, even if the student isn’t currently paying them back.</p>

10

<p>To cronie: Thank you for the link. I read through Krugman’s op-ed twice, and placed it in my Favorites for additional read-throughs. Krugman’s clear writing style clicks with me. I’m going to look for more of his writings on this issue.</p>

<p>To JHS: Your explanation is exactly along the lines of what I expected to hear. Forewarned is forearmed, though. Thank you to a Philadelphian from a former Philadelphian (and parent of a future Philadelphian).</p>

<p>To BCEagle91: I’m going to take a another look at Paulson’s comments. My biggest concern about this financial situation is that there won’t be enough money available for Sallie Mae to continue administering federal student loans at the current financial level. As an increasing number of families with college (and college-bound) students fall through the financial cracks, an increasing number of college students will qualify for federal student loans. However, if federal student loan borrowers currently in the repayment phase are less able (or unable) to pump money back into the system, where will the money necessary to issue new federal student loans come from? I am also concerned about the possibility of a “Robbing Peter to Pay Paul” scenario, in which Sallie Mae’s assets will be used to help bolster Fannie Mae and Freddie Mac. I am confused about Sallie Mae’s present and prospective role in this financial situation.</p>

11

<p>TimeCruncher,</p>

<p>I have a feeling we’re all about to get a financial education, including experts in, “complex banking and finance matters.” Unfortunately I don’t think we are dealing with a billion dollar problem, more like a trillion dollar problem. For many of us it will be (or already is) the worst economic situation in our lives. Like you I don’t completely understand what’s going on or how much it is likely to deepen in the next few months and years. Under such circumstances, I have to take a worst case approach personally. I began cutting back on spending a little over a year ago in anticipation of my oldest starting college this fall and even though resources are not as scarce as I thought they would be, maintaining cut-back mode is still a good plan, and I’m already acclimated. I’d rather be prepared for the worst and have things turn out better than I thought than to be unprepared and risk my family’s collective and individual futures.</p>

<p>The bigger problem I see due to a shaky economy is loss of income. There are a two aspects to this: 1) loss of a job may mean no income or reduced income for a significant period of time, and 2) loss of a job, or a cut in pay can limit ability to borrow or serve as a co-signer for junior.</p>

<p>The college graduate may find it more difficult to get a job that pays what they had hoped for, or to be able to pay off college loans. My advice to those going into their senior year would be to visit the career planning office early and often. For non-seniors, I’d recommend doing everything you can to graduate in four years - or less. An extra semester means foregoing a paycheck for another 7 months while spending and/or borrowing more money.</p>

<p>For those HS seniors I would recommend putting an financial super-safety on your list of schools. (It should still be a school you like though.) If the economy gets real nasty, you may need it.</p>

12

<p>I don’t mean religious faith but faith in that there is a solution and that solution can be implemented by leadership.</p>

13

<p>How does someone know if they should personally worry about the current financial crisis? I understand the OP’s concern for availability of student loans in the future, so that would be one reason to worry. If your job is dependent on a strong economony, that would be another. Losing a lot of your retirement money in the stock market could be a big problem for some of us, too. What else? Are there other areas that we should be looking at?</p>

14

<p>Paulson was very specific that one group of people should see none of the Treasury’s money: Long-suffering Fannie and Freddie shareholders.</p>

<p>Here is how our colleagues summarized Paulson’s objection in the article linked to above: “Mr. Paulson does not want to help the shareholders because of the ‘moral hazard’ it would create–desensitizing investors to risk because they believe the government will bail them out. It’s a similar position he took during the government-orchestrated rescue of Bear Stearns by J.P. Morgan Chase & Co.”</p>

<p>[Deal</a> Journal - WSJ.com : Fannie and Freddie: Another Bailout That Leaves Shareholders Starving](<a href=“http://blogs.wsj.com/deals/2008/07/14/fannie-and-freddie-another-bailout-that-leaves-out-shareholders/?mod=homeblogmod_dealjournal]Deal”>http://blogs.wsj.com/deals/2008/07/14/fannie-and-freddie-another-bailout-that-leaves-out-shareholders/?mod=homeblogmod_dealjournal)</p>

15

<p>"I think that Sallie Mae is in much better shape given the difficulty of discharging student loans. They can leave loans on their books forever, and add fines making it look like they are generating revenue, even if the student isn’t currently paying them back.’ Quite true BCEagle and quite disturbing because of the long term implications. </p>

<p>The aforementioned assessment accounts for SMC’s 220% average increase in fee revenues since the turn of the century and their privatization. In the 2004-05 fiscal report the chairman A. Lord alluded to these fee increases as “On the fee based business front , we grew earnings modestly during an unusually challenging year in guaranteer servicing. At the same time debt management revenues increased more than 30% through contingency collections for a combination of government, guarantee agency and commercial clients. In the fourth quarter, we expanded our customer reach and and complemented our product suite and management expertise with the acquisition of arrow financial services, which specializes in the purchase of distressed consumer receivables as well as contingency payments” </p>

<p>Essentially SMC has admitted several years ago that the origination of SL’s is not their money maker but rather its in the incredible supplemental fees which they apply to borrowers in trouble (and sometimes those who do pay on time). And its interesting they consider a 30% average yearly increase in this arena to be ‘modest’. </p>

<p>And a combination of circumstances will ensure many borrowers will not be able be able to ‘pump money back into the system’. This would include the related problems of the mortgage mess, the price of fuel, and ironically the enhanced fees which SMC and the other large players themselves have applied to these notes. Simply put, by the predatory emphasis of their CEO’s they probably have pushed their ability to collect these revenues beyond what their 'client</p>

16

<p>To standrews: Thank you for your post. Like your family, my family lives frugally by necessity and choice. My daughter will begin college this Fall, fortunately with enough transferable AP credits to enter college as a first or second semester sophomore. She could graduate in under four years if–and this is a big “If”–she is able to register for the (quickly closing) pre-requisite-level courses required for her dual-major program. (She could also earn her M.A. with only one additional year in residence.) Right now, my family’s contribution to her college expenses will be a minimum of $10,000/year ($3,000/year above my family’s $7,000 EFC), and we intend to tighten our belts still further in order to make this contribution out-of-pocket, rather than take out parent loans. Still, if Sallie Mae runs into the same financial trouble as Fannie Mae and Freddie Mac, and my daughter’s Stafford and Perkins loans are reduced or cancelled due to Sallie Mae’s financial problems, my family needs a back-up plan to help my daughter pay for her education. Right now, I have no idea what that back-up plan might be.</p>

<p>To LongPrime: Thank you for your additional post. I researched Asimov’s Foundation trilogy, by the way. I want to read the entire series, so I’ve got my Fall reading cut out for me (and I think I’ll start by reading Gibbon’s The History of the Decline and Fall of the Roman Empire, as Asimov did).</p>

<p>To timely: Thank you for your post. I will check to see if our family’s employer-sponsored retirement savings is enmeshed with any risky investments.</p>

<p>To BCEagle91: Thank you for your additional post and article link. I read the WSJ article and placed it in my Favorites. I also checked Google news for Paulson’s recent comments and re-read them.</p>

<p>To Atana: Thank you for your post. The information you provided is grim, but it is what I expected to hear. I can easily envision the federal student loan safety net disappearing from beneath financially needy college students. My daughter is among the “fearful” college students you mentioned. Yesterday, as she and I were watching and reading the news about Fannie Mae and Freddie Mac, and discussing the possible impact upon Sallie Mae, she remarked, “I’m sure the government is more concerned about mortgages than about student loans.” She thinks there is a possibility that the Stafford and Perkins loan programs will be sharply curtailed–perhaps even discontinued–while she is still in school. Could she be right?</p>

17

<p>She could be correct and for two reasons. First would be the already extant lobby pressure against such as the Perkins programs. That has reached a level wherein there was actually an internal directive within the USDOE to deemphasize such programs.
The second factor would be monetary limitations, in the last decade there has been an increasing emphasis from direct funding into secondary modes of student support. And that combined with the recent bailouts of both the mortgage and SL industry (the recent move to save liquidity was a probable bailout) means that available funds will be limited.
There is some political pressure within academia to increase grant amounts or to transition away from the loan model. But grants have been subject to years of actual reductions. So additions at this point will be more a matter of regaining lost ground that actual increases to students.
There has been some very serious discussions within academia and by parents and students as to how to resolve this situation…but it could be difficult as those groups do not have the lobby power of the corporate people who have the USDOE on a leash.
Could be an interesting year, and the whole situation is problematic enough from economic or academic perspectives that it won’t be able to be kept quiet too much longer.</p>

18

<p>To Atana: Thank you for your additional post. I will look into the details you provided, and I will share your information with my daughter.</p>

19

<p>Your welcome…</p>

<p>The whole situation is almost surreal. Before the redirection and attendant emphasis on privatization the federal student loan programs were more or less workable and equitable for colleges, student borrowers and the general economy.
But within so short a time after the effective changes, these companies have somehow made an incredible mess of the whole situation. After all some of these companies had made record profits, including the aforementioned 1000%+ increase in stock values and almost unprecedented benefits for their CEO’s. People get after Gates and Microsoft for their business practices, but at least they could keep their systems stable and indirectly have done some social good. </p>

<p>But it certainly whatever the SL barons did with their largely government sponsored bonanza, it was anything except applying it to keep the system stable. But perhaps stability and by implication service to students and colleges was never their intention…</p>

<p>And ironically as I wrote this the BBC was explaining exactly how bad the Fannie Mae, Mac situation actually is…with some clearly stated British worry about runs on US banks and etc. When the SL mess becomes more evident and combines with the mortgage debacle…I wonder when the overseas markets are going to effectively try to quarantine US financial systems.</p>

20

<p>To Atana: Thank you for your most recent post and additional information.</p>

<p>I took a look at the interactive stock charts (on <hoovers.com>) for Fannie Mae, Freddie Mac, and Sallie Mae to see how they compare over one, five, and ten years’ time. I saw that Fannie and Freddie tend to parallel each other, while Sallie differs; however, I also saw that all three institutions were declining by early to mid-2007, with Sallie’s plunge the wickedest of the three. As I mentioned in my initial post, my knowledge of finance is poor, and yet, Sallie’s chart compared to Fannie’s and Freddie’s looks ominous to me. </hoovers.com></p>

<p>I’m glad you mentioned the BBC, because you reminded me that foreign news sources might provide a more candid (and accurate) picture of the situation than the news sources here at home. Yesterday, while browsing the Web for information, I found a June 19, 2008 *The Independent<a href=“UK”>/i</a> news article entitled, “End of the Road with Sallie Mae,” which reported that Sallie Mae abruptly pulled out of the British student loan market, “owing to the credit crunch,” leaving British postgraduate students “in the lurch.” That article is among the news reports which prompted me to start my thread this morning. (If Sallie Mae has abruptly cancelled its loans to foreign students, then is abrupt loan cancellation for U.S. graduate, pre-professional, and undergraduate students far behind?)</p>

<p>I don’t understand what you mean by “quarantine US financial systems,” but I will find out.</p>