Student loan securitization braces for a hit
WASHINGTON (Reuters) - The market for student loan asset-backed securities -- rattled already by the troubled mortgage-backed securities market -- expects another hit soon from legislation being finalized in Congress.
Lawmakers will begin trying to reconcile Senate and House of Representatives bills this week after months of scandals in the $85-billion U.S. student loan industry involving kickbacks and conflicts of interest.
The biggest impact of the wide-ranging reforms is likely to be cuts in federal subsidies to student lenders such as Sallie Mae (SLM.N), Citigroup (C.N), JPMorgan Chase (JPM.N), Bank of America (BAC.N) and many others.
"There will definitely be some cuts ... It's just a question of how deep the cuts will be and how many unintended consequences come out of that," said Tom Deutsch, associate director of the American Securitization Forum.
Other industry groups said last week that several new student loan financings have been put on hold and that loan financing costs are up. Analysts said a recent securitization deal went off at a higher spread than usual, a sign of skittishness among institutional investors.
Subsidy cuts would pare the profits of lenders and make the securitization deals they do with Wall Street less attractive, particularly if Congress, as expected, cuts default insurance coverage for federally guaranteed loans, analysts said.
Some lenders may exit the business or merge, according to David Hartung, senior vice president of U.S. structured finance at credit rating group DBRS Inc.
"While the number of student loan securitization issuers may, too, shrink, the dollar volume of student loan securitization should not. The market may simply see more or larger transactions from fewer issuers," Hartung said.
Loan volumes are unlikely to shrink as demand is strong, Hartung said. Fueling demand are factors such as steady college enrollment increases, tuition inflation, and the unique government backing behind most, if not all, student loans.
WALL STREET TIES
Others are not so sure. They wonder what a student loan asset-backed securities (ABS) market crisis might mean for students who increasingly depend on loans to pay for college.
Since 1998, more than $350 billion in student loans have been bundled and sold as securities, including a record-setting $79 billion last year. More are in the pipeline but may not be completed for a while until markets stabilize, analysts said.
A study by RBC Capital Markets said subsidy cuts and related changes being considered by Congress would "eliminate the incentive for private capital to flow" into the federally guaranteed student loan system.
Supporters of the cuts say the system furnishes lenders with more than enough profit to absorb the changes.
Lending money to students has been big business since the early 1990s, when college costs began far outpacing inflation. At the same time, funding for other aid, like grants, stagnated, while a wave of innovation swept world debt markets. Continued...
