Private Loan Delinquency Trends: A Peek At First Marblehead Student Loan Trusts

December 2008 servicing reports came out today for First Marblehead private loan trusts.  I wanted to see what I could glean by looking at trends over the past year.  I focused on the 11 trusts starting with 2005-1 through 2007-4 (FMD has not completed a private loan securitization since September of 2007 which marked the beginning of the credit crunch) representing over $9 billion in private loan principal.  The standard profile for these trusts which consisted of loans originated by Bank of America, Chase and RBS Citizens and others:

• Cosigners
  • Creditworthy cosigners:  79-84% of total principal (depending on trust)
  • Creditworthy non-cosigned loans:  15-21%
  • Creditready loans:  0-3%
• School program
  • Undergraduate:  78-86%
  • Graduate:  8-15%
    • Decreased in 2007 trusts due to increased usage of Grad PLUS loans

Here are the trends for the last 12 months for the portfolio of loans described above (all figures are weighted averages for the eleven student loan trusts described above).

Portfolio Characteristics	12/2008	9/2008	6/2008	3/2008	12/2007
Delinquencies	11.2%	13.4%	11.9%	13.2%	9.9%
Forbearance	10.4%	12.2%	11.1%	13.2%	9.8%
Cumulative Default Rate	6.6%	6.5%	4.9%	4.5%	3.2%

Notes:

• Delinquencies calculated as percentage of loans in repayment
  
• Forbearance expressed as percentage of loans in repayment + loans in forbearance status
• Cumulative defaults as a percentage of loans in repayment (principal balance of all loans that have entered repayment plus cumulative principal payments that have been received by the trust.

Highlights

• The best way to analyze these figures is to compare them on a year over year basis (e.g. compare 12/2008 figures to 12/2007) given the seasonality factor.  Given the large number of loans that enter repayment in the 4Q (the denominator for the calculations above), this quarter tends to experience the lowest rates of delinquency and forbearance as compared to the other three quarters of the year.   
• Over the past year, delinquencies and defaults for these private loan portfolios have continued to deteriorate. 
  
  • On a year-over-year basis, delinquencies overall for the 11 loan trusts have risen by 1.3% from 9.9% to 11.2%
    • The four 2007 vintage trusts had delinquencies increase at the fastest rate.  They had rates of increase of 3.3% to 6.7% which is not unusual since significant damage from delinquencies and defaults often occur early in the repayment term.  
    • The three 2005 vintage trusts saw delinquencies stabilize with several of them experiencing declining rates of delinquencies.
  • Meanwhile, cumulative default rates doubled over the last year from 3.2% to 6.6%.  The more seasoned portfolios, the 2005 and 2006 vintages, showed the largest increase on an absolute basis. 
    
    • One key investors will be looking out for are when do the cumulative default rates begin to slow (or grow at a slower rate). 
• Forbearances, which provide borrowers with the ability to postpone payments during a period of financial hardship, increased slightly to 10.4% from 9.8% a year ago. 

One other way to look at this is to track each of the trusts individually and see how their delinquency rates, forbearance usage and cumulative default rates trend over time.  By comparing these curves one can get a sense as to how the trusts are performing relative to one another at a given point in time. 

Comments

[linkenheil@cox.net]

Given what is going on in the overall economy I would think that an investor would be ok with these numbers compared to the RSMB and credit card markets.