Fitch Ratings said in a report today that student loan securitizations backed by larger concentration of rehabilitated Federal Family Education Loan Program (FFELP) loans tend to be riskier than non-rehab FFLEP deals.

Volumes of rehab loans in student loan ABS increased to more than $6 billion in 2012 from almost $1 billion in 2003. Fitch said in the report that rehab loan volume is expected to remain at current levels over the next couple years.

The ratings agency compared performance of rehab loan trusts to non-rehab trusts to confirm whether specific cash flow assumptions are consistent with actual performance. Fitch reviewed the performance of two trusts; one with 100% rehab loans and one with no rehab loans.

“Compared with traditional FFELP collateral, rehab loans exhibit distinct characteristics, including higher defaults,” said managing director Michael Dean.  “Cumulative defaults are higher for rehab loans, although they still benefit from the same government guarantee of at least 97% of principal just like traditional non-rehab FFELP loans.”

As a result Fitch builds in separate assumptions for transactions in which 5% or more of the collateral is comprised of rehab loans.

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