Fitch noted the following concerns regarding private student loan asset-backed securities (ABS):
- Weak job market:
- Student loan borrowers are graduating into a dreadful job market and co-borrowers are not immune to the wave of unemployment filings.
- Home equity no longer an option:
- Ability to refinance private student loans using home equity in an effort to avoid default has become difficult for parental co-borrowers in light of severely declining house values and credit availability.
- Student loan performance no longer lagging economy:
- "In addition, negative student loan performance traditionally lagged economic recessions by a significant margin as students have either not yet matriculated or opted to pursue advanced degrees instead of joining the workforce. Fitch has noted that this lag is shrinking in the current economic crisis."
- Anticipates conditions will worsen through 2010:
- "Fitch anticipates that rising unemployment will continue to have a worsening affect on private student loan performance through 2009 and well into 2010."
- Losses on student loan portfolios significantly exceeding expectations, with current vintages and DTC loans having most variability:
- "Fitch has noted that certain private student loan trusts are projecting losses that are 1.5 to two times initial expectations. Trusts from the 2006 to 2008 vintages and those with higher concentrations of 'direct to consumer' or DTC loans are experiencing the greatest variability in performance.
- Highlights Sallie Mae and Student Loan Corporation as performing best in sector and not likely to be downgraded in near-term.
- "In particular the Sallie Mae and Student Loan Corp securitizations are tracking closest to Fitch's expectations and are still able to generate sufficient excess spread to cover losses limiting the likelihood of negative rating actions over the near to mid-term.
Why does this matter?
While the government hopes that programs like TALF will spur the student loan securitization market back to life again, ongoing concerns about weakening fundamentals in the underlying collateral, which will play out over the next 12-24 months may diminish investor interest. Without a vibrant securitization market, it is difficult to imagine additional credit flowing into the private student loan market.
We shall soon find out as additional details about the TALF program are expected later this week.
Related story:
- Fitch places three KeyCorp student loan transactions on ratings watch negative (February 25, 2009)
Related posts:
- First Marblehead 10-Q provides insights into securitization markets (February 12, 2009)
- Private loan delinquency trends: A peek at First Marblehead Student Loan Trusts (January 26, 2009)
- Sallie Mae raises $1.5 billion from Goldman Sachs for private loans (January 8, 2009)
- Private loan delinquency and default trends key to securitization markets reopening (September 2, 2008)
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