The Department of Education has revealed more details about its plan to promote liquidity for FFELP lenders, shedding light on two programs - loan purchase and short-term liquidity facilities - included in the recently enacted "Ensuring Continued Access to Student Loans Act of 2008."
Market players said that both programs serve as a stopgap measure by the U.S. government to ensure that there's enough capital to fund FFELP loans for the 2008 to 2009 school year. But even though these initiatives are definitely a boost to FFELP lenders, the question that is being asked is what happens when these programs end?
One thing is certain, however: It is now more economical for FFELP lenders to issue loans under the two new programs rather than tap the securitization market - so student loan ABS volume will likely dip while SLABS spreads tighten.
As a result of the new programs, staple issuers like Sallie Mae and Nelnet will do a lot more business this year. (The former responded favorably to the legislation and said that it will continue to participate in the FFELP program.) Not only that, but smaller issuers who have had difficulty tapping the term ABS market will likely find the terms of the programs attractive as well, according to Joseph Astorina, an analyst from Barclays Capital.
"Based on the details of the plan as it currently stands, it would indicate to us that these proposals would be a very attractive alternative to lenders for funding their businesses," Astorina said. "As long as the lenders can fund through the government program cheaper than they could in the securitization market, it makes more economic sense for them to fund completely through the government program. Of course, we expect that there will be some issuance from student lenders in the term ABS market even if it's a little bit more expensive because they would want to keep their programs in front of investors."
Under the loan purchase program, lenders could make forward arrangements with the Department of Education to sell FFELP loans originated for the 2008 to 2009 academic year (it is applicable to loans originated from May 1, 2008 up to Sept. 30, 2009). These arrangements have to be made by July 1, 2009.
The department will be buying the loans at par including accrued interest plus the 1% government origination fee as well as a flat $75 cost per loan to make up for the lender's administrative costs. The lenders could complete these sales by Sept. 30, 2009 and retain the servicing on the loans up to this date.
As an alternative, JPMorgan Securities analysts explained that the department will also offer warehouse financing trusts to lenders for up to 15 months at a rate of CP plus 50 basis points. Market sources have described this as a short-term warehouse line for FFELP lenders that is sponsored by the government.
Questions remain about the loans that will go into this government facility. Gary Santo, a managing director who heads up consumer ABS at Fitch Ratings, said that the more mechanical details of the facility are still being worked out, such as whether ratings will be required at some level.
The larger question that's in the minds of many student loan players is what happens in September 2009, when the facility expires. If the state of the credit markets prohibits lenders from financing their loans outside the facility, they would then sell their loans to the federal government, including all servicing rights.
With only one servicer currently under contract with the federal direct lending program, "from a risk perspective, there's a capacity issue," Santo said.
JPMorgan analysts said that they remain unsure whether a private company or the department's servicing platform would offer the more cost-efficient or better choice.
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