Fitch Ratings expects more banks to unload their holdings of government guaranteed loans amid greater interest from potential buyers.

On Friday on July 11, Wells Fargo said it had transferred its $9.7 billion Federal Family Education Loan Program (FFELP) loan portfolio to held-for-sale during the second quarter. Speaking during a conference call on second quarter earnings, executives said that the sale could take place in the next quarter and that the portfolio could be sold in one piece or broken up into smaller pieces. Wells Fargo does not service the loans.

The announcement follows CIT Group's sale of its $3.6 billion FFELP portfolio to Nelnet in April.

“Importantly, we believe these transactions will provide a framework (e.g. structure, valuation) which may set a precedent for more banks and not-for-profit companies to sell their FFELP assets,” Fitch said in a report published today. It believes that logical buyers include Navient Corp. and Nelnet, since each already holds sizable FFELP portfolios and service federal student loans for the Department of Education.

Banks have not originated FFELP loans since 2010, when the U.S. government began lending directly to borrowers. To date, few banks have sold the portfolios,; Fitch believes that this has been due to a shortage of attractive opportunities to redeploy sale proceeds. However, new regulatory requirements combined with improved prospects in core businesses and strong interest on the part of companies that specialize in servicing these loans are making sales more attractive.

“Portfolio acquisitions would be positive for Navient's credit profile as they would create additional earnings capacity and potentially extend the duration of the company's existing portfolio,” Fitch stated in the report. “However, the pricing and financing of any potential acquisitions would also be considered.”

Wells Fargo and CIT represented two of the top 15 largest holders of FFELP loans as of September 2013, according to data from ED. Other large banks and not-for-profit companies with sizable FFELP portfolios include the Brazos Group, JP Morgan, PNC, Access Group, SunTrust, Bank of America, Northstar Guarantee, and US Bank.

 

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