Social Finance’s second private student loan securitization of the year, which priced Friday, is also its first to include loans refinancing the debt of medical residents.
Loans refinancing the debt of medical residents and fellows account for approximately 5% of the collateral for the original collateral for the transaction, SoFi Professional Loan Program 2018-B Trust, according to rating agency presale reports. The collateral for the deal was upsized, to $900 million from $700 million originally, in response to strong demand, though investors demanded slightly higher spreads on the senior notes compared to SoFi’s previous student loan securitization, completed in January.
Residency loans are generally considered to be nearly as safe as loans to fully practicing doctors, yet they must be underwritten differently. Because medical residents earn far less than a licensed and practicing doctor, they generally do not have enough free cash flow to qualify for an ordinary refinance loans. SoFi projects future income to determine if a borrower has the ability to repay student loans upon completion of a residency program.
Loans to medical residents and fellows are also negatively amortizing. SoFi’s new product, which was introduced in October, allows residents to consolidate their existing loans and make a single, $100 monthly payment during residency or fellowship. Full repayment starts once borrowers have completed their training, or up to 54 months; at that point, any accrued but unpaid interest is added to the balance.
By comparison, borrowers with advanced degrees and high-paying jobs tend to pay down additional principal, resulting in relatively high rates of prepayment.
As of Jan. 31, SoFi had originated approximately $79.3 million in Medical Residency Refi Loans to approximately 430 different borrowers, according to DBRS.
These loans accounted for less than $50 million of the total final collateral for 2018-B, according to a person familiar with the transaction.
It does appear that they had a meaningful impact on the overall credit quality of the collateral pool. In many respects, the credit metrics of 2018-B transaction is very similar, if not superior to that of the previous deal, 2018-A. The average balance is slightly lower, at $70,198 vs $74,007, and the weighted average borrower income ($165,448 vs $137,946) and credit score (774 vs 765) are higher.
But the weighted average monthly free cash flow is lower, at $6,997 vs. $7,274.
Another notable difference is that all of the loans backing 2018-B are fixed rate, whereas a small percentage of loans backing 2018-A are floating rate.
Neither DBRS nor Moody’s Investors Service devoted much ink to residency loans in their presale reports. Moody’s noted that “these borrowers remain exposed to unemployment or underemployment risk since they are not employed full time,” but added that they “typically have strong employment prospects and higher future income, which lowers the likelihood of default in the long run.”
The shorter-dated senior Class A1 tranche was priced to yield 30 basis points over swaps, 5 basis points wider than the comparable tranche of the January deal. The longer-dated senior Class A2 tranche pays 60 basis points over swaps, also 5 basis points wider than the same tranche of the January deal. (All of the Class A notes have the same legal final maturity, but the Class A2 notes do not receive any principal until the Class A1 notes are repaid in full, and so are outstanding longer.)
But the subordinate trance priced 5 basis points inside the spread on the same tranche of the previous deal, at 100 basis points over swaps.
Merrill Lynch, Pierce, Fenner & Smith, Deutsche Bank Securities, Goldman Sachs, and Morgan Stanley are the initial purchasers of the notes.
SoFi isn't the first lender to refinance the debt of medical resident and fellows; there are at least two lenders, LinkCapital and Splash Financial, that cater to these borrowers. Laurel Road, a division of Darien Rowayton Bank, also offers medical residency refi loans in addition to its standard refinance loans for graduates with a broader range of degrees and good- paying jobs.