The recent decline in performance of Sallie Mae’s private student loan securitizations is linked to the more restrictive forbearance policy the lender introduced in early 2008,according to a Moody’s Investors Service report.
Policies on forbearance — when to allow borrowers to suspend some payments during financial troubles — vary widely from lender to lender, Moody’s analysts said. Although forbearance can prevent a distressed borrower from having to default, it can also prolong the period before a loan defaults if the borrower’s situation does not improve, resulting in a higher loss.
Starting in early 2008, Sallie Mae implemented several changes to tighten its forbearance policy, leading to fewer and shorter forbearances being granted. As a result, Sallie Mae’s private student loan transactions have seen their delinquency rates and, most recently, default rates rise more sharply than have the transactions of the other major issuers.
According to Moody’s data, the delinquency rates on Sallie Mae’s private student loan transactions rose from 3.7% in the first quarter of 2008 to 9.3% in the second quarter of 2009. During that period the percentage of loans in forbearance dropped from 16.5% to 4.9%.
In the second quarter of 2009, the most recent full quarter for which complete data are available, the average default rate for Sallie Mae’s transactions jumped by two full percentage points to 5.1%, while the default rate for the other major issuers increased a much more moderate 0.2%.
"We believe that changes in Sallie Mae’s forbearance policies account for a significant portion of the differences in patterns between Sallie Mae’s performance data and those of the other major issuers," said Moody’s assistant vice president Tracy Rice. "Specifically, the tightening of the forbearance policy and the decline in forbearance rates caused a corresponding increase in delinquency rates as some borrowers who encountered difficulties making loan payments and previously would have been granted forbearance by Sallie Mae instead became delinquent."
Moody’s does not expect the policy change to have a material impact on the cumulative losses of the Sallie Mae transactions. The changes will therefore have had no impact on their ratings.