With the unemployment rate for young college graduates staying at a record high, more recent student loan securitization vintages backed partly by loans to young college graduates are performing worse than earlier vintages, said a report released today by Moody's Investors Service.
The rating agency said that young graduates’ unemployment negatively affects student loan credit performance.
The differences in concentration of young college graduates in various SLABS vintages contributes to the divergence in default performance among the vintages, Moody's explained.
According to the rating firm's Private Student Loan Indices, default rates rose over the past year for the 2005-07 and 2008-10 securitization vintages that have more loans to young college graduates. The default rate drop for the more seasoned 1999-2004 securitization vintage, which are backed by a lesser number of loans to young college graduated, Moody's stated. This is compared with the increase in the rates of the other vintages.
The 1999-2004 securitization vintage has older college graduates and continuous improvement. This securitization vintage has the least number of loans to young college graduates, and its default rate dipped to 3.2% in 1H11 from 3.6% in the 1H10, according to Moody's.
It also has less exposure to the weak job market since it has bigger concentrations of older college graduates. The unemployment rate for older college graduates is less than half versus that of young college graduates and is slowly beginning to improve over the past year.
Additionally, loans from this vintage have seen their peak default years, leaving behind loans of stronger credit quality. The 1999-2004 securitization vintage should therefore be the most resistant to defaults during a time of high unemployment.
The 2005-07 securitization vintage has a lot of young college graduates and considerable defaults, Moody's said. The 2005-07 securitization vintage, which has the highest defaults, has a large concentration of young college graduates. The default rate for the 2005-07 securitization vintage rose to 6.4% in first-half 2011 from 6.0% in first-half 2010.
The reason for the poor performance is the poor employment prospects for young college grads along with weak underwriting. The unemployment rate for young college grads for 1H11 was at a record-high 9.0% compared to the first-half of previous years. The loans securitized between 2005 and 2007 are of weaker credit quality because of looser underwriting policies.1
Although this vintage has the highest default rate, this should start to stabilize sometime in 2012 and then begin to slowly dip given that the loan pools backing this vintage are almost past their peak default years. The loans in the 2005-07 vintage defaulted at record levels in the recent recession leaving behind loans of stronger credit quality as the weak credits exited the pool. Thus the loans remaining should be more resistant to times with high unemployment versus the loans in the original pool.
The 2008-10 vintage has the most young college grads, but not the highest defaults. The 2008-10 securitization vintage contains the largest concentration of young college graduates, but low seasoning and stronger underwriting mean that this vintage does not have the highest default rate.
While the default increase for this vintage is high, the level is less than that for the 2005-07 vintage. In first-half 2011, 4.7% of student loans in the 2008-10 securitization vintage defaulted, up from 3.8% a year ago.
Two reasons explain why defaults are not more than the 2005-07 vintage. The first is because the loans that back the 2008-10 securitizations are comparatively unseasoned and just started to default in 1Q10.
The second is because most of the loans have stronger underwriting considering that many issuers that securitized poor credit quality collateral left the market prior to 2008, and most issuers that stayed in the market either scaled back originations of poor credit quality loans or did not include their poorest credit quality loans from their securitizations, Moody's said.