In its latest Securitized Products Weekly, Nomura Securities cited Sallie Mae’s announcement from last week that stated $4.5 billion of FFELP loans, which comprise about 3% of its portfolio, was expected to consolidate under the Special Direct Consolidation Loan Initiative.
Nomura analysts believe that this consolidation wave presents ABS investors with opportunities.
Even though this level of consolidation would cause only a 6% increase in CPR for the overall student loan portfolio in the second and third quarters of the year, analysts think that there could be prepayment differences across deal type and vintages with more recent Stafford ABS transactions are likely to experience higher prepayments.
The Department of Education (ED) offered Special Direct Consolidation Loans to eligible borrowers with at least one student loan held by ED — a Direct Loan or a FFELP loan owned by ED and serviced by one of ED‘s servicers — or at least one commercially-held FFELP loan in grace, repayment, deferment, or forbearance. FFELP borrowers that opted to consolidate profited from a 0.25% interest rate reduction and the opportunity to receive an additional 0.25% if automatic debit is chosen for repayment. The effect of the consolidation wave should be the strongest for post 2007 Stafford deals, the report said.
However, the ED owns a large share of the Stafford loans that were originated during the 2008-2009 and 2009-2010 academic years. Therefore, because students are likely to borrow multiple times over the course of their post-secondary education, most Stafford loans originated in the previous academic years (2006-2007 and 2007-2008) should be eligible as well.
Nomura analysts also said that these loans may experience much higher speed increases than the average 10% that analysts projected in the overall Stafford universe.
As a result of the volume of consolidation to third parties reported by Sallie Mae, analysts estimated that the Special Direct Consolidation Loan initiative would push CPR upward by an additional 10% on average for Stafford loans and 4% for consolidation loans in 2Q12 and 2Q13.
On the other hand, FFELP deals will likely not be equally affected by the consolidation wave given the eligibility criteria. Since eligible borrowers are required to have a Direct or FFELP loan owned by the ED, more recent Stafford loans probably going to be the most eligible.
Nomura analysts said that prepayment speeds will probably reset at lower levels after this consolidation wave resullting from burnout because loans that passed on the Special Direct Consolidation Loan initiative are less likely to consolidate in the future. However, in terms of Stafford loans for schools that were previously not eligible, these loans can still be consolidated when the borrower enters the grace period.