The Profits of Education – How University of Phoenix and other For Profit Schools Survive and Over Charge Students because of Government Backed Loans. Billion Dollar Growth Industry yet what is the Benefit to Society?
Over the last couple of years, I’ve seen the for profit education system plaster the airwaves with advertisements that seem to come on during the part of day when most are working or very late at night. Now clearly in this current recession you have to wonder how an institution is making money when it seems most places are fighting just to stay afloat. The ugly secret of course is that one of the biggest beneficiaries of this recession is the for profit education system. As many states are cutting back classes on state schools and raising fees, the for profit system has found a niche. Target those that are underemployed or sick of their job since that is a large part of the population. But how will these people pay? That is where the U.S. government and taxpayer dollars step in and leads us into our story.
For profit schools have become a multi-billion dollar industry over the last 15 years:
The biggest player in the group is Apollo Group Inc. which many of you know as the University of Phoenix. They operate other for profit schools but the University of Phoenix is their cash cow. We’ll focus our energy on this school since it is the largest and most profitable of the for profit system:
Since 1995 when APOL was trading for $1, the stock has risen to $64 or an 8,462 percent increase. The current market cap of Apollo Group is $9.96 billion. Revenue for the company has steadily grown and actually saw a nice jump in 2009 thanks to the recession and massive amounts of marketing:
Source: Apollo Group 2009 Annual Report
Now the report tries to emphasize their diversification but in reality the bulk of revenues come from one source, the University of Phoenix. Student enrollments have been brisk and growing as people that are dealing with this recession seek the convenience of online classes and also more flexible hours. Also, state schools that are cheaper and carry more bang for their buck don’t have sophisticated marketing arms like the for profit system. But what really is the purpose of the degree for most? They want to ensure gainful employment. Yet that isn’t usually the outcome for most. In the 175 page annual report, nowhere do we see median income of graduates. It makes you wonder why if that is probably the biggest objective of most that are shelling out thousands of dollars. Or are they? We’ll get into that soon but you are actually subsidizing this multi-billion dollar corporation.
Clearly the bulk of revenues come from the University of Phoenix (UofP). Of $3.974 billion in revenues $3.766 billion (94%) come from UofP. So it is safe to use Apollo Group and University of Phoenix interchangeably. Enrollment for degree programs exploded in 2009 across all degrees:
In 2009 443,000 people enrolled into one of their programs. Yet what is interesting is we are told that only 9,000 people graduated from the UofP in the last year of reporting data. Try searching for the word “attrition” in the 175 page report and good luck finding it.
You will also have a hard time finding the actual cost of the program anywhere on their advertisements. You would think this would be available since their marketing strategy includes:
“Internet Marketing
Broadcast and Print
Direct Mail
Sponsorship and Advertising
Stadium Naming Rights – Arizona Cardinals Stadium
Relationship with Employers
Referrals”
Yet no price tag. We also don’t get the median wage of graduates. It is all about getting people into the program. But if we find out that many people that enroll don’t have money, how are they paying for it? The U.S. taxpayer through government loans:
Read that above paragraph carefully. The only way these schools can operate is by using 86% of government backed loans and grants. The student loan market has exploded in the last 15 years:
What happened in the housing market has also occurred in higher education. Easy access to cheap debt has allowed anyone and anybody to take out massive amounts of debt to pursue anything even if they are unable to pay. This is reflected in the massive default rates of for profit schools:
These numbers are off the charts and one would expect that 2008 and 2009 data will be higher. But look at 2006. A 27 percent default rate for Western International University. We are talking about subprime student loan borrowing here. That is why you do not find the word attrition in the report. Attrition means people falling out of the system once enrolled. The Higher Education Act has a “90/10” rule which basically means that people enrolling in these programs need to put 10 percent in cash and the rest can be borrowed. Doesn’t this sound like the toxic mortgage mess that inflated the housing bubble? As we have seen above, UofP pushes this ratio to the limit.
But with government giving easy access to loans, this has inflated the cost of education as well:
Source: NY Times
Over the last 30 years the biggest inflation has been seen in the education sector even outpacing healthcare costs if that can be believed. Part of this has to do with the massive amount of loans in the market. And as we have seen in the above chart, many of the too big to fail banks are in this game as well.
The New York Times has a great article on this topic. UofP isn’t the only school living off of government cheese:
This seems to be the status quo. Some fascinating quotes in the article:
“If these programs keep growing, you’re going to wind up with more and more students who are graduating and can’t find meaningful employment,” said Rafael I. Pardo, a professor at Seattle University School of Law and an expert on educational finance. “They can’t generate income needed to pay back their loans, and they’re going to end up in financial distress.”
And isn’t this probably the main reason why people pursue these degrees? At least that is the message conveyed in their advertising. Let us see what is told to people in the trenches:
“They tell people, ‘If you don’t have a college degree, you won’t be able to get a job,’ ” said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch of ITT Technical Institute, a chain of schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. “They tell them, ‘You’ll be making beaucoup dollars afterward, and you’ll get all your financial aid covered.’ ”
Ms. Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay their loans.”
$40,000 a year seems steep for an associate degree that you can get at your local community college for a few thousand dollars. The average annual cost for these for profit schools is $14,000. The glamorous hard pitch sale doesn’t meet up with the actual reality or even results for that matter:
“Jeffrey West was working at a pet store near Philadelphia, earning about $8 an hour, when he saw advertisements for training programs offered by WyoTech, a chain of trade schools owned by Corinthian Colleges Inc., a publicly traded company that last year reported revenue of $1.3 billion.
After Mr. West called the school, an admissions representative drove to his house to sell him on classes in auto body refinishing and upholstering technology, a nine-month program that cost about $30,000.
Mr. West blanched at the tuition, he recalled, but the representative assured him the program amounted to an antidote to hard economic times.
“They said they had a very high placement rate, somewhere around 90 percent,” he said. “That was one of the key factors that caused me to go there. They said I would be earning $50,000 to $70,000 a year.”
Some 14 months after he completed the program, Mr. West, 21, has failed to find an automotive job. He is working for $12 an hour weatherizing foreclosed houses.
With loan payments reaching $600 a month, he is working six and seven days a week to keep up.”
So you have someone that went into debt for $30,000 and is unable to find work with his degree. Now, he is paying $600 to service the debt. In fact, education in these cases can be extremely damaging to your financial health. And again, the problem is the government making these loans here. No one will dispute an education is important but when you have an unregulated market, just look at what happens in the banking sector. All of a sudden it isn’t the company that produces the best result that wins but the one that can suck in the most people even if they do it with deceptive practices. Do you think banks would make these loans? Of course not. But they sure will allow the Federal government (aka you) to make these loans for programs that have high costs and low return.
If people had to pay out of their own pocket these schools would be gone. And this story is true with subprime lending and even other aggressive toxic waste loans. In the end, the lure is promising but the end result is financially disastrous.
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No Hope for Option ARMs or Alt-A Loans – Loan to Value Ratios of 169% Simply do not Qualify for Help and Cement the Destiny for Billions in California Loans. Two Case Examples in Irvine and Garden Grove.
One of the big problems that really isn’t addressed when discussing option ARMs or Alt-A loans is the fact that many are tied to the hip with second liens. If it wasn’t bad enough to have one toxic mortgage imagine having two. It is also a bad twist of fate that most of these loans (upwards of 60% of option ARMs) are in the state of California. With home prices still scraping the bottom of the barrel, some option ARMs are pulling in combined loan-to-value ratios of get this, 169 percent. Is it any wonder why California is destined to have problems with their housing market for years to come?
Another issue with second liens is the fact that many lenders have no incentive to give up their position. Under HAMP, a current HAFA initiative is pushing for second liens to be relinquished for a small sum (i.e., $1,000) but the likelihood of success is small. Why? First, this will make the second mortgage holder realize a massive loss for a small sum. Say the loan was made by WaMu for $50,000. They either get $1,000 and realize the loss or pretend the asset is still worth $50,000. Many banks will opt to pretend with the latter option.
This chart was examined on Rortybomb:
The chart is full of juicy data. But take a look at the Alt-A and option ARM categories. Even with the first mortgage only, under the “Curr LP LTV” category we already have astronomical negative equity. But throw in that second lien and combine the loans and we start getting negative equity that is off the charts. Many of the second note holders are completely underwater.
This is where another problem becomes present. What if the second mortgage originated from the same lender as the first? This is the case on many loans:
The above data is for a home in pre-foreclosure in Irvine California. Countrywide has a second for $330,000 and a third mortgage for $280,000. So do you think $1,000 is an incentive to take a $610,000 write down? The home would probably sell for $700,000 today or barely enough to cover the first mortgage. This is where the real problems will hit and bigger write downs are destined to happen.
Or here is a more clear cut case:
This is a pre-foreclosure in Garden Grove. MortgageIT is imploded lender number 306. The home above is probably valued at $280,000. So the 2nd is worth zero and the 1st is worth half of the current balance. A $1,000 may not be incentive enough for whoever holds this note to move on the place if it requires a major writedown.
The short sale program looks to move forward in April so we’ll have to wait and see how many lenders are ready to jump on this. There is little reason to believe that option ARMs or Alt-A will have a pretty outcome.
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The Complete Guide to Toxic Mortgages and the Housing Situation of California – Option ARMs, 55 Percent of Jumbo California Loans are ARMs, 794,000 Distressed Properties, and Failed Loan Modifications.
An updated chart highlighting the option ARM and exotic mortgage loans made during the height of the bubble still shows us that many loans will go bad in the next couple of years. We need to remember that the vast majority of troubled option ARMs were made from 2004 to 2007. While analysts claim that there will be no reset problems, courtesy of low interest rates, the real problem stems from the recast of the mortgage. Much of this is typically hidden until it explodes like a financial time bomb. The reason this issue has somewhat lost steam in 2010 is that now, the really toxic loans are segregated into a handful of states including California, Florida, Arizona, and Nevada. If you live in these states, be prepared for additional bumps in the housing road ahead.
Let us look at this new updated chart and try to figure out what is really going on with option ARMs but also with other toxic loans in states like California:
Source: SNL, Credit Suisse
The data released only this month, highlights that between 2010 and 2012 some $253 billion of option ARMs will adjust and another $163 billion in Alt-A loans will reset. This is extremely troubling because most of these loans were made in states that experienced the brunt of the subprime disaster. You can imagine this hitting in a two wave fashion. First, the subprime wave filtered through and now the option ARM and Alt-A wave will cast a shadow but only on a select number of states. This older chart shows this two wave process:
Source: Amherst Securities
For the last few months we have been in the eye of the hurricane. While wave one has largely passed, wave two is only beginning to gear up. One of the ideas being bandied about is that nothing will come from this second wave. The assumption is all will be well. We bought some time with the government loan modification programs known as HAMP but after almost one year of the program, only 168,000 permanent loan modifications have been made nationwide and many of the option ARMs don’t even qualify for this. Banks have been trying to figure out what they can do with option ARMs but not much can be done because many of the borrowers do not or cannot continue to make payments on the loan.
Some staggering data from a Fitch report released late in 2009:
94% of borrowers made minimum payment only*
46% of all option ARMS were 30+ days late (with only 12% hitting recast)
Average loan-to-value ratios up to 126%
*With minimum payment loan balance increases through negative amortization
The above data was released back in September 2009 and most of the option ARMs are in California (roughly 50 to 60 percent). Since that time housing prices in the state have not gone up. So it is highly likely that more option ARMs are 30+ days late and LTV ratios are even worse as balances continue to grow while asset prices remain stagnant or retreat. It is understandable that following nationwide coverage of the housing problem can ignore the option ARM issue because it is pinned on only a few states. But these states will continue to face issues as these loans linger in financial limbo. If we look at some of the option ARM lenders like WaMu (many are now gone) we can see how concentrated they were in only a handful of states:
The above is from the $52.9 billion option ARM portfolio of WaMu in 2008, at a point when the option ARM spigot had turned off. WaMu had 50% of its option ARM loans in California. If we add in Florida, that number jumps to 62%. So this really is a problem that will hit a few states squarely. But to understand the depth of this, let us first get an actual number of loans in California:
California Housing Units with a Mortgage: 5,290,276
Source: Census, 2008 American Community Survey
We then have to figure out how many loans are currently in some form of distress or in foreclosure:
“(MBAA) The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 4.58 percent, an increase of 11 basis points from the third quarter of 2009 and 128 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 15.02 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.”
The latest mortgage data shows us that 15.02 percent of all mortgages are 30+ days late or in the foreclosure process. Now California has more troubles because of the option ARM concentration but we’ll be conservative and use the 15.02 percent figure:
5,290,276 * 15.02 percent = 794,599 properties 30+ days late or in foreclosure
I ran the numbers a few days back and found that only 154,000 properties are listed on the MLS in California. So what is going on with those 600,000+ properties that are 30+ days late or in foreclosure? Wells Fargo which acquired a large option ARM portfolio from failed Wachovia tried a few adjustments but they seem to be more extend and pretend methods of stalling the inevitable:
“(CNBC) Pay option ARMs are the new subprime, defaulting at high rates now thanks to adjustments as well as good ol’ unemployment. According to its Q3 earnings report, Wells Fargo, the fourth largest U.S. bank by assets, has $79.2 billion in debt on these loans alone, down from $101 billion a year ago, in addition to other ARMs and fixed-rate loans and full-term loan modifications. Wells didn’t make the Pick-a-Pay loans, they just inherited them when they bought Wachovia at the beginning of this year. Wachovia relished in selling these risky products in the most overheated housing markets. Suffice it to say, many many many of these borrowers are way way way underwater on their loans.
Enter the interest-only product, which will allow borrowers to defer their balances from 6 to 10 years. This keeps the borrowers in their homes, paying a little every month. I called over to Wells Home Mortgage and spoke with CFO Franklin Codel. He told me that Wells has written down principal on the “vast majority of these loans.” Yep, just given that debt away, written down so far the tune of $2 billion, or about $46,000 per modified loan. So far Wells has turned about 43,500 Pick-A-Pays into interest-only ARMs.”
Since that time, mortgage distress has risen to a historic 15.02 percent and in California, there is little reason to believe the rate is any lower. The above adjustment is yet to be seen as helping any sizeable number of borrowers. It is also the case that banks have been reluctant to do any kind of principal reduction because this would force the bank to realize the actual loss on their balance sheet. In other cases loans have been extended out to 40 years with lower rates but as HAMP has shown, even this isn’t enough to make a change if you have no job:
Source: HAMP
Only 168,000 permanent loan modifications have occurred through HAMP. What needs to be remembered that over the last decade, housing has shifted into a commodity where very little value is placed on the home as a place to set your roots and instead became a place to count your home equity. With much of the equity stripped out, how many people will want to continue supporting a high mortgage when the home isn’t worth that value? A handful of studies have shown that the number one predictor of foreclosure is negative home equity. Virtually every option ARM in California is in a negative equity spot so that probably means 70 to 90 percent foreclosures on these places once we roll through the next wave.
What will banks do? Well so far they have shown us that ignorance is bliss. They have left the mortgages at face value and have no desire in pursuing a foreclosure (at least for now). Why would they? Say they have a $500,000 option ARM on a home now worth $250,000. The loan has now grown to say $575,000 because of negative amortization but the borrower stopped paying once a recast was hit. The bank can now claim an asset of $575,000 and lose $3,000 or $4,000 a month in missed monthly payments or realize a loss of $250,000 to $300,000 by foreclosing on the home. So we may not see a big tsunami hitting us all at once but the wave will hit and it will be painful and drawn out.
In fact, if we pull data on some of the areas in California we will see entire blocks with massive amounts of distress:
Source: Foreclosure Radar
Just look at the estimated equity column. Most of these homes don’t even show up in the MLS. But these are massive losses. If we look at the loan data we find a few option ARMs and a few familiar names including IndyMac.
Yet that isn’t the only problem falling on a state like California. There is also a number of jumbo loans:
California has 845,000 active jumbo loans. And a large number are already in foreclosure or are now 30+ days late. These loans carry big balances. What is even more troubling is 55% of jumbo loans are adjustable rate mortgages. With mortgage rates slated to increase this year, we can expect the foreclosure rate to zoom up.
The option ARMs, the Alt-A toxic loans, jumbo loan issues, and a 12.5 percent unemployment rate the highest in recorded history tells us the next wave will hit. The mainstream media isn’t covering this because it really is a state specific problem. But that is of little solace for those that live in sunny California.
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