Warning: Skip this post if you have an allergic reaction to financial footnotes otherwise continue on for a look at a creative method to manage private loan delinquencies and forbearances.
From Sallie Mae's 4Q Supplement: "On a year-over-year basis...while loans in forbearance decreased from 7.0 percent to 5.5 percent."
- On a dollar basis, loans in forbearance dropped from $1.562 billion on December 31, 2008 to $1.420 billion on the same date in 2009.
Should be end of story right? Only one complication as I stumbled upon this statement in the same supplement:
Hmm...so if I understand this practice correctly, a delinquent borrower goes immediately from delinquent to current without actually appearing in the forbearance figures at the end of the reporting period (I was not able to find out what criteria were used in determining which borrowers might be eligible for this program). Leads to a more existential question: When is a forbearance not a forbearance. Answer: When it's duration doesn't last past a reporting period (not much of a postponement period I guess). So, you might be wondering, what is 1.9% of loans in current status? With $21.408 billion of loans in current status as of December 31, 2009, that would amount to $407 million.
If a majority of these $407 million in loans would have previously been given a forbearance, well, yes, suddenly that decrease in forbearances might be looking a lot less like a decrease and more like an increase (read on). It is certainly not difficult to see the attractiveness of this approach of shifting these delinquent borrowers back into the current column. With this one maneuver, delinquencies are reduced, loans in forbearance decline and potential defaults from these delinquent borrowers, well the default clock starts at zero again, so any chargeoffs get pushed out another 212 days. Oh, and I almost forgot one other likely benefit in that I would think that the company also collects a forbearance fee (see this post for description of Sallie Mae forbearance fee). I guess all this may sound good, unless you are concerned about the underlying credit quality of the private loan portfolio.
But wait (as they say in those Ginsu commercials), there's more. As I went back to research when this practice began, I found it appeared first in Sallie Mae's earnings supplements starting in December of 2008 (see end of post for details):
Here are the figures from those periods (in millions of dollars). I am referring to this practice as immediate forbearance:
|Current Loans||Forbear (%)||Forbear ($)|
1.5% here and 3.0% there may not seem like much, but the cumulative effect is quite dramatic, with almost $2.2 billion of loans being provided this immediate forbearance, or 10.2% of their current loan portfolio. Which got me wondering if that 77% increase in over 90 day delinquencies from $838 million to $1.488 billion in the past year might be some of these same accounts making another roundtrip through the delinquency "not so merry-go-round".
So, perhaps this is much ado about nothing. But some answers to these questions below would go a long way toward dispelling concerns:
- What percentage of loans in current status have made their scheduled payment in the past 30 days?
- For those delinquent borrowers who were granted forbearance and made current under this new policy, what delinquency buckets did they find themselves in prior to being granted a forbearance?
- What has been the performance of the $558 million in loans from 4Q 2008 that fell under this new policy? Twelve months would seem a fair amount of time to gauge the extent that this policy is merely postponing the inevitable vs. aiding a significant percentage of borrowers.
- What are the criteria that determine which delinquent accounts are eligible for this program? (the volumes in this program have varied from $270 million to $569 million over the past five quarters)?
- Is this practice of granting forbearances to make delinquent accounts current only carried out in the final month of the quarter or every month? If every month, what are the percentage of loans from every month in 2009?
4Q 2008: "As of December 31, 2008, 3 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during December."
1Q 2009: "As of March 31, 2009, 1.5 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during March."
2Q 2009: "As of June 30, 2009, 2 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during June."
3Q 2009: "As of September 30, 2009, 3 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during September."
4Q 2009: "As of December 31, 2009, 1.9 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during December."