While it originated a record amount of student loans, the lender acknowledged that current market conditions will force it to make loans at an economic loss.
"We've been predicting something of a train wreck, with the absence of credit and the explosion of demand for student credit," said Albert Lord, CEO of Sallie Mae. The collision between the demand for higher education borrowings and the shortage of credit is coming much sooner than expected. At first, company officials expected the crisis to unfold sometime between June and August. Based on the current pace at which lenders are leaving the consolidation loan market and the rate of student loan applications, however, that trajectory has changed, Lord said.
"I would say the loan demand is here and it's right now," Lord said. To that end, he added, "the company is working with members of both parties and members of Congress to make solutions for lending viable, and we hope soon."
Student borrowers are not the only ones in great need of credit. As for the company's access to reasonably priced funding, CFO Jack Remondi said that issue was challenging at the beginning of the year and has worsened, compounded by the steady exit of other FFELP lenders.
Sallie has issued $5.8 billion in student loan ABS for the year so far, at a duration basis spread of 87 basis points.
"Our outlook in loan origination activities is very much dependent on how this major issue evolves during the next week or so," Remondi said.
Spreads for the asset class are up 15 fold since last summer, and have more than doubled in the past six weeks, despite the fact that trusts that issue government guaranteed student loan ABS can still repay triple-A bond holders in full, even with a 100% default rate, Remondi said
Although the company is actively working with members of Congress, the Department of Education and the White House to assemble a viable funding solution for the student lending business, company officials hesitated to lay full blame for its present situation on federal policies.
One analyst asked company officials whether the operating results were an unintended consequence of reductions in special allowance payments (SAP), which were meant to make borrowing cheaper for student, but actually had the effect of making borrowing more expensive for them.
So many factors had entered the fray that it was hard to break down the situation and figure out to what extent the term securitization market and legislative actions were to blame. Borrowing costs are up about 130 basis points against the best term financing, but is probably up as much as 125 basis points against what the company would have expected to fund in the term market, said Lord.
"Whether that was legislation or the term ABS market is hard to pinpoint," Lord said. "The fact is the economics are not working and we need to make a structural change."
At the end of the first quarter, the company's core earnings were $188 million, down about 25% from $251 million from the same period last year. The company excluded an $82 million acceleration of premium amortization expense because it decided to stop making consolidation loans, as well as non-recurring items of $21 million, according to a company statement.
In terms of its beefy loan origination numbers, Sallie reported that it made $8.7 billion in loans, an increase of 9%, broken down between federally guaranteed loans that $6.3 billion and private loans that amounted to $2.5 billion, Remondi said. Those origination numbers were likely driven by students who have read reports of the lenders exiting the market for federally guaranteed loans, and were prompted to rush to secure funding, Lord said.
Its core student loan spread was 146 basis points, a decrease of 31 basis points from a year ago.
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