Here is the paraphrased transcript from Sallie Mae Investor call today relating to their private credit business (Al Lord, Vice-Chair and CEO led the call):
Changes to private credit product: "We changed our private credit product in 2009. It needed changing from both credit and financeability standpoints. It will be more collectible since the student and/or cosigner has to pay immediately [SLA note: Smart Option requires interest-only payments during the in-school period]. What makes it more financeable is the fact that it is much a better credit, better cash flow and shorter asset life."
Market acceptance of Smart Option Loan: "Larger question is what was market acceptance with more stringently designed and priced product. Results are a little bit mixed, I am encouraged and I belive basically we have the right product. Our volume is down for 2009. We expected it to be
down some and will be down for full year to $3.5 billion year. [SLA note: For those wondering if this was a big miss, just two months ago Sallie Mae executives said in their 2Q conference call, "For this calendar year we’re looking at originations that will total
around $5 billion in the private credit book." If they come in at $3.5 billion in loan originations for 2009, this would be a 40% drop on a year-over-year basis]. This is at least 25% below what we thought was a fairly modest expectation. Total market is down. Government increased higher guaranteed loan limits which takes down private loan volume on a dollar for dollar basis. Our application flow has been good. If there has been a surprise, it has been that our approval rate has been lower. This can be explained by our more stringent underwriting criteria, both in terms of seeking higher FICO scores and cosigner rates. We are looking to have 90% of loans cosigned. Good credits, those with high FICO scores are a whole lot less interested in getting a cosigner. Higher cosigner rates have slowed the flow of approvals because of need to "chase the cosigner."
- For readers of this blog, the weak market acceptance of Smart Option may not have been much of a surprise, as the early reviews from college campuses seemed to be an indicator of things to come.
Future projections: "We expect nice growth in 2010 [SLA Note: Remember that if 2009 comes in as Sallie Mae has planned at $3.5 billion, originations would be down almost peak 52% from 2007 levels]. Our guys on the firing line are telling us that we are going to improve our throughput, improve our numbers without altering credit quality."
Returns on business: "On technical side the product is designed to yield 4% pretax return, 2.5%
after-tax. We assume double digit capital levels vs. 8% we had assumed previousely. At 10% capital level, mid-20s Return On Equity. At a 12% capital level, it is a 20% ROE."
Current rates average LIBOR + 10%: "Gross yield depends on credit risk that we measure. These loans made at generally LIBOR + 10%. This sounds like an enormous number but LIBOR + 10% means about 10.3% today with LIBOR at 29 basis points [SLA note: The numbers clearly will look more enormous on these variable-rate loans when interest rates rise. Remember that over the last 20 years, LIBOR has ranged from 0.3% (today) to over 9%.]
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More commentary on conference call to follow. Had extensive comments about FFELP situation.
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