Bill could revamp student loans
WASHINGTON -- As more college students seek financial aid in the troubled economy, the U.S. House of Representatives today is set to overhaul the nation's student loan system.
For students, little in the application process would change beyond a shorter and more simplified form. But more money could be coming their way, and Congress would rework the bureaucracy to potentially save $87 billion in the next decade.
"Overall, it saves a lot of money and allows more money to go into college loans over 10 years," said U.S. Rep. Bob Etheridge, a Lillington Democrat. "It really gets the money into the schools rather than the financial institutions."
The bill would cut out banks and other private lenders who now are subsidized by federal taxpayers. Instead, all lending would be done through the federal government -- a switch that has some critics calling the proposal yet another government takeover.
The money saved by the switch would pay for education programs, including increases in Pell Grants for low-income students. The federal government would plow billions of dollars into programs to increase graduation rates, boost historically black colleges, and expand access to two-year community colleges.
"We have to educate our way to a better economy," Education Secretary Arne Duncan said to reporters this week. "This represents a better investment and commitment to our nation's young people."
But those opposed to the bill say it kills the free market.
"This legislation bears many of the hallmarks of a big government takeover," said U.S. Rep. Virginia Foxx, a Banner Elk Republican and former community college president, in a prepared statement.
"Not only will the government now completely dominate the student loan industry, but thousands of jobs will be destroyed and students will be rewarded with fewer choices," she said.
Democrats say the bill as it stands would save money and allow the government to pay down the deficit. But the nonpartisan Congressional Budget Office found last week that economic changes could boost spending overall by $10.5 billion.
The legislation comes as colleges are swamped with needy students.
UNC-Chapel Hill financial aid director Shirley Ort said 17 percent more students are applying for financial aid this year, and 23 percent more qualify for need-based assistance.
"We've never seen anything like that before," Ort said.
In North Carolina, student aid requests for the UNC system and private colleges have jumped 10 percent in the past year, according to Steve Brooks, executive director of the N.C. State Education Assistance Authority. For community colleges, the increase is 30 percent.
Both Brooks and Ort said that though they appreciate the increased financial aid, they're troubled by some of the legislation's provisions. Most significant, the bill would cut out the state education authority's work issuing federal loans in favor of direct government loans.
Ort said many in the state's financial aid community want to see private loans issued as they are now, with the assistance authority often as the preferred lender.
"We realize that may not happen," Ort said. "We think for years they've given us what one writer called 'dirt-cheap loans,' and they've helped generations of our students here."
A provision sponsored by Etheridge and Rep. David Price of Chapel Hill, both Democrats, tries to make up for some of the potential loss. The provision would allow nonprofit agencies to contract with the Department of Education for other loan-related work such as financial counseling.
The legislation is expected to pass today in the House.
It then goes to the Senate, where the education committee is scheduled to vote this month. North Carolina's senators, Democrat Kay Hagan and Republican Richard Burr, sit on the committee.
Wells Fargo CEO Sees Bad Loans Rising
NEW YORK -- Wells Fargo & Co. Chief Executive John Stumpf reiterated Wednesday that he expects the San Francisco bank's nonperforming assets, or troubled loans, to increase next quarter. He also said the bank has used 21% of its credits for losses tied to some commercial and foreign loans from Wachovia Corp., which Wells Fargo purchased last year.
Speaking at a financial services conference in New York hosted by Barclays PLC, Mr. Stumpf said Wells Fargo has used $2.2 billion of an available $10.4 billion in credits for losses from the most troubled of Wachovia's commercial and foreign loans. Wells Fargo has a remaining $8.2 billion to cover future losses from the loans, which include mortgages tied to commercial properties like office buildings and housing developments.
Separately, Mr. Stumpf said he expects the bank's levels of nonperforming loans, or loans that may become uncollectible, to increase.
"Considering the current economic environment, we would expect our nonperforming assets to continue to increase," Mr. Stumpf said.
Wells Fargo issued a similar forecast when it reported its earnings for the second quarter.
Mr. Stumpf's message is a contrast to remarks on Tuesday from the chief executive of Regions Financial Corp., C. Dowd Ritter, who said nonperforming loans at his regional bank, based in Birmingham, Ala., likely peaked in the second quarter.
Shares in Wells Fargo were recently up 86 cents, 3%, to $29.44.
Wells Fargo bought its teetering rival, Wachovia for $12.7 billion at the end of last year after the Charlotte, N.C., bank began to crumble under losses from billions in risky home loans. A crucial component of Wells Fargo's merger of the two banks is whether Wachovia's piles of risky real-estate loans perform as Wells Fargo initially expected over the coming quarters and years.
During this decade, Wachovia expanded aggressively into mortgages for commercial properties such as housing developments and office buildings. Analysts widely expect commercial real-estate loans to hit banks with heavy losses over the coming year since losses from commercial loans typically rise months or years after losses from home loans surface.
At the time of the purchase, Wells Fargo was permitted by accounting rules to declare $96.2 billion of Wachovia's loans as "credit-impaired," or likely to produce losses. Wells Fargo was allowed to immediately write off the $40.9 billion losses it expected those loans to generate in order to prevent the bank from being damaged by Wachovia's loan troubles.
Of the $40.9 billion in credits for Wachovia losses, Wells Fargo said Wednesday that it has used $3.8 billion thus far to offset losses on Pick-A-Pay loans, a risky type of home mortgage.
"Overall, our impaired loans, including Pick-A-Pay and commercial real estate, have performed in line with our original expectations," Mr. Stumpf said. He called those loans "the two loan portfolios of most interest to investors."
Wachovia issued more than $120 billion of the risky home loans, which offered borrowers the option of four monthly payments, including a minimum payment that increased the loan's balance.
Wells Fargo expects the most troubled Pick-A-Pay loans, whose losses can be covered by the credits, to generate another $22.7 billion in losses.
FDIC Completes Pilot Troubled Loan Sale
The U.S. government said Wednesday it was moving forward with a test program to help deal with the toxic loans still weighing on bank balance sheets, providing a glimmer of hope on an issue that has repeatedly stymied policy makers.
The Federal Deposit Insurance Corp. said Fort Worth, Texas-based Residential Credit Solutions had the winning bid to take part in the program to offload troubled real estate assets from both failed and still solvent banks. Residential Credit Solutions, which services mortgage loans, will pay $64.2 million in cash for an equity stake in a $1.3 billion portfolio of residential mortgage loans seized by the FDIC when a Texas-based bank failed last year.
The transaction is likely to be closely watched by investors and public officials eager to see if it resolves the issue of how banks will deal with the troubled assets on their balance sheets. The Treasury Department, FDIC and other government agencies have introduced a number of programs to deal with the problem, with little success to this point.
FDIC officials, discussing the transaction with reporters, said the goal of the Legacy Loans Program continues to be to "cleanse balance sheets to put banks in a position to raise capital."
The FDIC said the transaction with Residential Credit Solutions will give the firm an ownership stake in a newly created limited liability company that will receive the $1.3 billion loan portfolio from the FDIC, which has held the loans since the failure of Franklin Bank last November. In return for the portfolio, the new limited-liability company will issue a government-backed note worth $727.8 million to the FDIC, which the agency said it would likely sell into the open market in the future.
FDIC officials said that the transaction will likely mean the government receives 70 cents on the dollar for the portfolio, much higher than the 50 cents on the dollar that regulators originally expected to receive for the troubled mortgage loans. That should in turn reduce the $1.6 billion estimated loss the FDIC originally forecast when it took over Franklin Bank.
"It will be reducing the expected losses from Franklin because we are obtaining a higher expected return on the loan portfolio," and FDIC official told reporters.
The FDIC's troubled loan program was originally targeted at assets held by open institutions, but officials suggested Wednesday that the pilot program, if successful, could become another option for the growing collection of assets the FDIC holds as a receiver for failed banks. Officials said the FDIC has around $30 billion in assets in receivership, a figure expected to get larger as banks continue to fail at increased rates.
"We are likely to use a similar type of structure for the sale of assets, particularly distressed assets, for failed institutions," an agency official said.
