Back in 2006, mortgage loans were a sure thing. House prices were always on the up, mortgages were paid and people were making money in real estate. There was no chance that the huge run up in subprime mortgage loans were going to cause any lasting damage. Until they did and all hell broke loose in 2007.
One bank saw it all coming, dumped most of their real estate holdings and stopped originating new mortgages. That bank was JP Morgan. That single move spared them the pain of the recession and helped them expand and grow while others languished.
For a few years now, student loans have started to worry observers due to their potential to cause new havoc. Currently, student loan balances have topped $1.3 trillion, and servicing has gone way down increasing the number of people with missed payments. Now, student loans are not easily dischargeable via bankruptcy so most people don’t see a scenario where defaulting loans cause the kind of issues mortgages caused in 2007/8. But I’ve always been of the opinion that debt is debt and so when people cannot pay it they will find a mechanism to default on it. And when they do in sufficient enough numbers, there will be an impact.
It appears that not only does JP Morgan agree, but that they’re acting to leave that market. They stopped originating new student loans since 2013. Now, they’ve announced that they’re selling their entire student loan portfolio for around $6.9 billion to Navient, a student loan management company and essentially getting out of the business.
Does JP Morgan exiting the market have significance? You bet. It might not be a bearish signal for the whole economy but it’s a sure fire bear signal for the student loan market.
What will happen if that market goes bust at these levels? Your guess is as good as mine. A few companies might be in trouble. Or it might set off a domino effect that might upset other markets. Like residential real estate, student loan companies, a few major banks with huge exposure.
We’ll just have to see.