Student Lending Analytics Blog

DBRS Report Notes 66% Jump in Private Loan Defaults In 3Q

Here is their executive summary of the DBRS 3Q Private Student Loan Report, which tracks the performance of private student loan collateral backing 39 trusts:

The weak job market [SLA note:  See post on weak employment numbers and defaults] and slow economic recovery continue to plague the private student loan ABS market. In the third quarter of 2009, performance of the private student loan collateral backing the 39 trusts that comprise the DBRS Private Student Loan Indices continued to deteriorate at a steady pace. Quarterly defaults spiked to record highs, while cumulative defaults continued to rise towards unexpected levels. Forbearance rates remained historically low [SLA note: Since SLM trusts make up over 50% of the index, their strategy over the last year of reducing forbearances has had a dramatic effect on the overall index] and delinquencies remained elevated.

More on the Bill To Create Private Student Loan Ombudsman Office

As posted on Friday, several senators introduced a bill to create an office of the Private Education Loan Ombudsman, in the Department of Treasury:

Sen. Sherrod Brown (D-OH), joined by U.S. Sens. Michael Bennet (D-CO), Al Franken (D-MN) and Barbara Mikulski (D-MD), today announced new legislation to help streamline assistance to Americans struggling with private student loan issues. The Private Education Loan Ombudsman Act, to be housed in the U.S. Department of Treasury, would help private student loan borrows address complaints or challenges by working colleges and universities and private lenders."

Check back here later in the week for the text of the bill, which was not available as of this evening.  The press release from Senator Brown's office provided these additional details:

• Purpose of the bill:  "This bill would establish a federal private loan ombudsman to improve coordination and assistance for private student loan borrowers just as exists with federal student loans."
• Described earlier formation of ombudsman office for federal student loans:  "The 1998 Amendments to the Higher Education Act established the Student Loan Ombudsman, which serves as a centralized federal clearinghouse to help borrowers navigate disputes and problems with federal loans. The Student Loan Ombudsman has earned the support of borrowers and advocates alike. Currently, however, no such federal resource exists for private student loans borrowers."
• Complaints would be reported to the Department of Education:  "The Private Education Loan Ombudsman would coordinate services with the Department of Education and Federal Student Loan Ombudsman to ensure that all complaints and problems are reported. The federal body would also assist borrowers in mediating and settling disputes with private lenders.

Earlier this year, Senator Brown proposed a debt swap plan to allow borrowers to swap their private loans for federal loans for borrowers who had not exhausted their federal loan limits (see posts here and here).  One wonders if one of the ombudsman's roles would be to help facilitate this debt-swap process, which could be challenging to administer.  Also, should FFELP be eliminated through the legislative process, this could open up the possibility that lenders might aggressively market private loan products since they would no longer have a federal loan product to sell.  I will keep my eyes out for both of these bills in the Senate bill that will be coming out of the Health, Education, Labor and Pension (HELP) committee sometime over the next few months. 

On Unemployment and Private Student Loan Defaults

In case you missed the morning announcement from the US Bureau of Labor Statistics, the unemployment rate has now sits above 10% (10.2% to be precise) and the total number of jobs now lost since December 2007 is over 8 million.  This article from the blog Minyanville captures the loss of white-collar jobs that has occurred during this recession:

"The months since the collapse of Lehman Brothers have been disastrous for professionals, except those in the fields of health care and education. From August to April, there was an overall drop in employment of 4.3%. More significant, however, were the steep declines in highly skilled occupations: 9.3% in computer and math jobs, 10.3% in engineering and architecture occupations, and a whopping 11.5% in arts, design, entertainment, sports, and media occupations."

To get a sense of how bad it has been for recent graduates, here is what one expert had to say:

Parsing Student Loan Corporation's 10-Q For Clues on State of Student Loan Market

Student Loan Corporation filed their 10-Q this morning.  With year-end fast approaching, and their credit agreement with Citibank expiring on December 31, 2009, a key development to watch out for will be their ability to negotiate a new funding agreement.  Here are the highlights:

• Explained their 10% drop in federal student loan originations due to increasing shift toward Direct Lending (see post here) and new regulations about preferred lender lists:

"The Company’s FFEL Program loan originations decreased by 10% for the three months ended September 30, 2009 as compared to the same period in 2008.  This decrease is largely due to schools moving from the FFEL Program to the Department of Education’s Direct Lending Program and adding additional lenders to their preferred lender lists to comply with regulatory requirements and concerns.  The impact of these actions was partially absorbed by the withdrawal of many lenders from the FFEL Program and overall growth in the marketplace."

• Almost 20% (19.3%) of their loans in repayment that were originated after January 2008 are in forbearance (see this post which shows how Sallie Mae has reduced their use of forbearance):
  • Page 38 of 10-Q:  $267 million of average uninsured standard private loans in repayment and forbearance and $51.5 million of loans in forbearance
  • Might partially explain their 47% decrease in private loan originations in the 3Q as they continue the recent effort to originate higher quality private education loans."

Servicing on Student Loan Xpress Loans Not Expected To Be Impacted by CIT Bankruptcy Filing

In case you get questions from recent Student Loan Xpress borrowers...

Here is the announcement from Fitch today:

"Fitch spoke with XLS regarding the potential implications of the CIT bankruptcy filing to XLS' operations and its capacity as servicer of the above mentioned transactions. XLS stated that it is 'business as usual' and that they continue to fill open positions as turnover occurs. Fitch believes that if XLS becomes part of the bankruptcy proceedings, a bankruptcy judge would consider the servicing operations necessary to protect trust assets and the total value of the estate. Therefore, the servicing operations would be maintained and expenses, including payroll, would continue to be funded. Additionally, the servicing platform itself is an asset and could be acquired by a third-party in a bankruptcy proceeding."

Chase's Participation In FFELP Program (Updated With Clarification)

From an email that I received from a financial aid director this morning: 

Fitch's 3Q Student Loan Report Card Chronicles Key Events Of Last Three Months

It was a busy quarter, which I was reminded of while reading this summary to the Fitch report (and SLA Blog was there for you chronicling the key events of the last three months as indicated by the number of links listed below): 

Student Loan Industry Review
The student loan industry continued to endure stress in the third quarter of 2009. On
Sept. 17, 2009, the House of Representatives passed the Student Aid and Fiscal Responsibility
Act (SAFRA), which would terminate the Federal Family Education Loan Program (FFELP) by
July 1, 2010. The Senate is expected to introduce its own version of the bill later this year.
More schools switched to the Federal District Loan program in the quarter, which could be in
anticipation of the FFELP termination if SAFRA is enacted. As a result, FFELP disbursements
dropped by 17% from the same quarter last year, according to data provided by the Department
of Education (ED). Fitch Ratings expects the FFELP market to continue to shrink as more
schools make the switch.

It's Good To Be A Servicer...

I forgot about this tidbit from the 3Q 2009 Sallie Mae conference call, in which they were describing the future of the company in light of the potential elimination of FFELP (seems to provide insights as to where the profits are for FFELP lenders too):

"In fact those loans as they now exist under contract would provide about $6 billion of servicing income stream over the years. It would also create liquid capital to better capitalize our private loan business. It would likely infuse that capital into our bank."

So, the FFELP loans on their books today will provide $6 billion of servicing revenue over their life...as for holding the loans, Sallie Mae plans to get out of that business by selling their FFELP loans:

"We very likely sell the $120 billion of our FELP loans to shrink our balance sheet to add capital. Of course we would service those loans."

First Marblehead Earnings: Good News, Bad News

Here is their 1Q 2010 announcement. 

Good news:  Boosted cash on their balance sheet to $475 million following quarter-end:

• Completed sale of private loan portfolio for $121.5 million from their Union Federal Savings Bank (generating a $121.5 million loss in the process).
• Refund of $177 million from the Internal Revenue Service

Bad news: 

• Company continues to burn cash at rate of $14.7 million in the quarter.  With their significant cash balances, they appear to have the runway to develop and refine a new business model while awaiting for the secondary markets to recover (if they ever do). 
• To the extent that FMD is a proxy for the private loan securitization markets, their stock chart seems to be signaling that the market doesn't anticipate a bounceback anytime in the near future.

WyoLoan To Suspend FFELP Operations in March

The Wyoming Student Loan Association (known as WyoLoan) provided these three reasons for their decision:

• "WyoLoan’s agent for originating and disbursing loan funds has undergone a transition and has advised WyoLoan that it will not be able to disburse loan funds after March 31,2010.
  • According to Mapping Your Future, WyoLoan's originator and disbursement agent is a division of Western States Learning Corporation:

Loan Servicing, a division of Western States Learning Corporation, is the loan servicing agent for Wyoming Student Loan Corporation (WyoLoan), First Education FCU, Trona Valley FCU, and UniWyo FCU. Loan Servicing also administers the Wyoming Teacher Shortage Loan Repayment Program (TSLRP) and the Wyoming Investment in Nursing Program (WYIN) for the State of Wyoming. Western States Learning Corporation is a private, nonprofit corporation that partners with lenders to service their student loan portfolios.