It is well known that the private loan market is seeing near-explosive growth. Now, the riskier side of such growth is coming to light, as Moody's Investors Service placed the rating of more than 16 notes in about a dozen student loan securitizations on review for possible downgrade.

The notes under scrutiny were issued from the National Collegiate Student Loan Trust between 2003 and 2007, and represent about $935 million in ABS. Moody's put the securities under review because the underlying loans, originated under the Education Resources Institute's (TERI) credit-ready and credit-worthy programs, are performing worse than expected. The question is whether the securitizations' existing credit enhancement will be enough to support their current ratings, which generally range from A2' to Baa3'.

Loans under the two programs were originated through what the industry calls the direct-to-consumer (DTC) channel, which puts student borrowers and their parents in direct contact with loan providers. Most student loans are originated through college referrals, but the DTC channel is the faster-growing segment.

"Loans originated through the direct-to-consumer channel appear to default at a significantly higher rate compared to loans originated through school financial aid offices," the rating agency said. In the case of the National Collegiate trusts, increased defaults from the DTC channel have slowed the growth of parity in the deals. Parity is the ratio of total trust assets to total liabilities.

Despite the closer scrutiny from Moody's, officials at First Marblehead said the company continues to monitor the portfolio very closely and that the loans' performance remains within its expectations. It is also working with Moody's as the rating agency carries on its review.

"We have tightened the credit criteria to anticipate this credit cycle," said Janice Walker, a First Marblehead spokeswoman. "We have changed the collection recovery process by taking steps to reach out to borrowers earlier in the process.

According to news reports, industry experts and lawmakers suggest that outstanding borrowings in the private loan segment stood at $38 billion in 2005, up from $4 billion in 2001. One market professional estimates that loan originations through the DTC channel have grown by as much as 30% for the past several years. Such stunning increase in business, however, comes with risks.

"Part of the problem is that there is not a lot of history behind private student loans," one analyst said. "The jury is still out on what their ultimate credit performance will be."

According to TERI's Web site, borrowers under the program dubbed credit-worthy must meet certain residency requirements, have an employment history of at least two years, and possess a satisfactory credit history of at least 21 months, among other qualifications. Applicants under this program do not need an established credit record, but the availability of those loans is restricted to graduate, accelerated or residency programs.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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