Barclays Capital analysts believe that the temporary and minor increase in prepayments from the Special Direct Consolidation program will have a limited effect on FFELP ABS bond valuations, according to the firm’s latest Consumer ABS Weekly.
The Special Direct Consolidation Program, which began on Jan. 17 and had a deadline of June 30, offered student borrowers the opportunity to consolidate multiple student loans held and serviced by various entities into a single direct loan from the U.S. government. Consolidation under this program would mean that particular program would lead to a borrower’s existing loans being prepaid as well as a new loan being disbursed.
Borrowers who applied for the program before the June 30 deadline will continue to flow through the system, appearing as prepayments in FFELP ABS transactions in the next couple of quarters.
Barclays reported that in Sallie Mae’s earnings call that took place late in the week of July 15, the company said it expects to prepay $4.5 billion in FFELP loans because of the Special Direct Consolidation program, of which $2.2 billion had consolidated as of June 30 while the remainder will be processed in 3Q12.
Analysts calculated the possible effects of the temporary increase in prepayments on FFELP ABS by analyzing the Nelnet Student Loan Trust 2008-4 transaction under several scenarios, which vary in degree of prepayments increase over the next two quarters.
They found that it would require a “severe and sustained” rise in prepayments to negatively impact the pricing of FFELP, which they deem as an unlikely scenario.