18 July 2017

Perversely Good News For Some Student Loan Borrowers

Toward the back-end of the previous decade, as the mortgage loan crisis hit bottom, a number of entities seeking to foreclose mortgages found themselves in a pickle: they didn't have the promissory note evidencing the debt secured by the mortgage. Mortgages are recorded in the real estate records of the county in which the property is located. Promissory notes, however, are (or should be) held by the lender or the entity to which the lender sells the debt.

Many folks may not understand that their initial mortgage lender within a month sells the promissory note and assigns the underlying mortgage (or deed of trust, it amounts to much the same thing). Initial lenders don't want to wait 30 years to get paid. They'd prefer to take a discount from a long-term investor for immediate cash. In theory, the note is endorsed or assigned to the buyer and physically transferred as well. If and when it comes time to foreclose, at least in the half of U.S. states that require foreclosures to go through a judicial process, failure of the foreclosing buyer to have possession of the note may be fatal to the action.

Why wasn't possession of the promissory note always transferred to the buyer of the loan? Carelessness, mostly. After all, in the run-up to the mortgage crisis, no one believed it could ever happen. And if there would never be a need to foreclose, failure to have possession of the note wouldn't be a big deal.

It turns out the same sort of sloppiness has occurred with some student loan notes. Go here to read the story in the New York Times. Turns out that some buyers of bundles of private student loans (which make up a relatively small portion of the student loan market) have been as careless as their mortgage-loan forbears. And they too have been met with the successful defense of "show me the note."

A pleasing result to the borrower, no doubt, but one that raises a moral question: should a borrower who has received a loan be entitled to avoid repayment on a "technicality?" If it makes any difference, this so-called technicality is an old one; it's been part of the law of negotiable instruments for hundreds of years.

(For some of my musings on morality in this general ballpark go here and here.)


  1. Technically correct is the best kind of correct. Especially, when your opponent is highly sophisticated entity profiting from grossly inflated student loan rates.

    They could seek an equitable solution (but only if you ignore the previous sentence).

  2. Very hard to gin up any sympathy for student loan investors.