Wednesday, August 31, 2011

Wall Street Journal: S&P Affirms Some Student-Loan ABS

When the country faced the debt ceiling fiasco, AEM discussed what could have potentially happened if the U.S. defaulted on its debt. I also talked with several experts, and the analysis was grim. Then S&P downgraded us, even after we raised the debt ceiling, and it remained to be seen how that would impact student loans. That was discussed from the vantage point of the market place, i.e., how would investors respond to the downgrade, what that could potentially do to variable interest rates on student loans, and what the would mean for people seeking student loans. More importantly, however, I wanted to touch upon the way it could affect current borrowers.

The outcome still remains uncertain, but the WSJ provided some information on S&P's ratings of student loan ABS.*

According to the Wall Street Journal, despite the sovereign cut, S&P has affirmed some student loan ABS. But what does it mean that "some" have been affirmed by the agency, and not all of them? Of course, it's one agency, and one that might be in trouble for the subprime housing crisis with the DOJ. What's even worse? According to Zeke Faux and Jody Shenn at Bloomberg News, S&P " is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government."

The reporters added, "[the agency] is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties."

Sooooooooo, let me get this straight. This company, that most likely played a role in bringing the world economy to its knees, destroying the financial security of millions of homeowners, is back at it again?!? To add insult to injury, they have downgraded the U.S., and now their going to give a triple-A rating to subprime home loans again?!? What in the f--k is going on here?!?

As for the student-loans, another agency - Fitch's (see below) - downgraded some student-loan backed securities in early July. We'll have to see what the outcome will be for the "other" loans.

I'm following this part of the story closely, talking to experts about these themes, etc. Stay tuned.

*ABS means "asset-backed securities," which were part of the now defunct FFELP program. These are loans guaranteed by the Department of Education. That means if a borrower defaults, the federal government will still pay the lender. (Sooo, I think you can see the connection here, i.e., a lenders disinterest in working with a distressed borrower? Who cares? They're gonna get the money anyway, so they have no incentive to work with struggling borrowers. Grand, right?!?) These asset-backed securities are also why Sallie Mae, Nelnet, and others lenders like to attract investors by talking about how much debt (via FFELP) they have on their books. These are seen as lucrative options for investors.

Related Links

"UPDATED: U.S. Expects Downgrade: Indentured Educated Class Officially F&$%ed!," AEM (Aug. 5, 2011)

"Quick Update: Default, The Debt Ceiling Fiasco, and Interest on Your Student Loans," AEM (Jul. 31, 2011)

"Your thoughts - The Debt Ceiling Fiasco and Student Loan Debt," AEM (Jul. 27, 2011)

"The Debt Ceiling Fiasco And Student Loans," AEM (Jul. 25, 2011)

"The Debt Ceiling: Why It's A Real Issue For The Indentured Educated Class," AEM (Jul. 25, 2011)

"Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans," AEM (Jul. 25, 2011)

"PHEAA - Fitch Downgrades Sub and Jr. Sub Notes for PARTS Student Loan Trust 2007-CT1," AEM (Jul. 6, 2011)

"Money Making Schemes: FFELP Loans, the Market, Sallie Mae, and Nelnet," AEM (Jul. 4, 2011)

"Steve Eisman Blasts For-Profits, Arguing 'Subprime Goes To College,'" AEM (May 28, 2010)

"In a free market world, anyone is game - even the most vulnerable," AEM (May 4, 2010)


Anonymous said...

Not sure which side this article comes down on the issue. Bottom line: Securitizations are much safer investments for wealthy households, international investors, financial institutions, and mutual funds than the arguably financially-illiterate mainstream media has been saying, particularly since 2008.

In particular, as an investor, it would be hard to find a safer investment than FFELP ABS. Not only is the underlying asset guaranteed by the federal government against default but the loans are guaranteed a specific rate of return on a quarterly basis.

A higher-than-originally-estimated payment of the FFELP loans by default claim rather than by the borrowers is not good news for ABS investors, though. For example, take an assumption that the typical borrower in the asset group will pay 15 years of interest. If borrowers start defaulting only five years into repayment at a higher rate than the prospectus originally estimated, then the cash flow generated by the securitization will be less than anticipated.

Downgrades of the federal govt's full faith and credit by "rating agencies" are irrelevant to these schema. More importantly, FFEL and DL are mandatory programs. Payments from the fed'l govt* to lenders and guarantee agencies must continue, even if the whole federal government "shuts down," even if there is no agreement on "debt ceiling." In fact, the federal flows of FFEL and DL continued during the long federal shutdown stalemates during 1995 and 1996.

*Note that there are also some payment flows from FFELP loan holders and guarantee agencies to the fed'l govt as well.

Cryn Johannsen said...

@Anonymous 8:58 PM - are you saying you're not sure where I fall, or how the WSJ is reading this type of thing?

When it comes to borrowers, and the people for whom I advocate, the situation is despicable. Higher Education should not be part of the market. It is corrupting, and has gotten us away from thinking of higher ed as a PUBLIC GOOD.

Anonymous said...

Ok. See, this is what I'm talking about. I have no idea what anyone is saying and I thought I was a reasonably intelligent, fairly well-educated person.

I can understand the individual words, but not the context they construct. I have no education in financial matters outside of what I could teach myself.

How am I, or anyone else not majoring in finance, supposed to make heads or tails of the fine print on a any kind of loan if I can't understand this short blog?
Why should I be held accountable to all the terms of my student loans when I had no real way of knowing what I was signing?

Maybe I should send them hate mail in German or Danish and see how they like not understanding what they read?

One Who Survived said...

Cryn wrote:

"Sooooooooo, let me get this straight. This company, that most likely played a role in bringing the world economy to its knees, destroying the financial security of millions of homeowners, is back at it again?!? To add insult to injury, they have downgraded the U.S., and now their going to give a triple-A rating to subprime home loans again?!? What in the f--k is going on here?!?"

What is going on here, is the aggressive and hostile replacement of the (Modern Age) state's authority over money (which was bad, but less bad than what is following) by the oligarchic powers of a new (and yet old) kind of feudalism.

"What is going on here" is both old AND new! Analogously (but NOT identically) Hitler's "National Socialism" was a Frankenstinian blend of CORRUPTION of "the old" mixed with very new, very revolutionary ideas indeed.

(Slight digression re Nazis being a revolutionary blend of old AND new: The Nazis ingeniously reinterpreted Christianity in ways according with brutal pre-Christian paganism AND the new cult of social-Darwinian "survival of the fittest", cf this part of "Triumph of the Will", in which the ancient Christian ritual of baptism is conflated with "cleansing the RACE", go to 0:14-15 here:

...and then follows, from 15:00 to 17:00, the Nazi version of the Holy Eucharist...

...and then ff to 1:10 to 1:12, Hitler "blesses" new Nazi flags by touching them with the "Blood Flag" of the first Nazi bloodshed, a flag with a bit of Nazi blood on it. That was yet another evil imitation of the Christian sacrament of remembering the blood of Christ.

Ah, but most Americans of today are not willing to imagine that Americasns could ever be like THAT? Hm, well look at a recent photo of a possible future President, Rick Perry

...will someone please tell me, HOW (if at all?) Rick Perry's style of waving a pistol among civilians, is categorically any different from Hitler's Brownshirts? Except perhaps for the fact that Hitler was in fact a technically talented (even if bloody boring) writer in his own language, as Rick Perry has never been.

In conclusion, just for now, in response to Cryn asking "What in the f-ck is going on here?" For now, here's my imperfect answer, as per my spiritual brother Marvin:

Cryn Johannsen said...

@OneWhoSurvived -

my dear, I know what's going on here! It's a rhetorical question.

It's called the triumph of neoliberalism, something I've written about a lot here.

Anonymous said...

@Anonymous 12:14

I think a big part of the dirty secret is that most of those in the financial industry themselves don’t really understand what they are saying either. They know bits and pieces, but few can see the big picture, and then those that really do understand seem to keep their mouths shut.

When I was getting my master’s, I actually did my research project (basically a thesis) on whether or not government should encourage renting versus homeownership for extremely low income households. The myth of homeownership for everyone was extremely strong and very much ingrained in everyone I spoke to, and especially to the professors that were reviewing my research project. I was doing intensive deep research and everything I found was counter to the conventional wisdom for housing finance at the time.

I basically got ripped apart by professors reviewing my drafts for daring to suggest anything contrary to the homeownership is best for everyone mantra, and eventually I had to write a bunch of nonsense to finish my master’s. I had to completely re-write several drafts because I was not writing what they wanted me to write. These professors made me feel dumb and worthless because the more research I did, the more evidence I found that the housing market was not sustainable and therefore there we were in a housing bubble that was going to burst. (This was a few years ago before the housing bubble officially occurred, I was ahead of the time.)

The sad thing is I figured out the housing bubble before it officially burst, but these esteemed professors and housing finance experts convinced me that I understood nothing. I felt like your post, yet I am an extreme data geek with a STEM background and I honestly thought that housing finance was not my thing, because I did not understand the housing experts. When the housing bubble officially burst, it turned out it was instead the housing experts that did not understand what was going on, and I had not given myself enough credit.

That is why I feel the need to be more involved in exposing the higher education bubble, because it the same thing all over again, but this time I know better. Just because so-called experts are supposedly smart and say a bunch of big words that seem smart, it does not mean that they know what they are really saying. I think they are too close and too engrossed in small bits and pieces to be able to see the bigger picture. They can’t see the forest from the trees as the cliché goes.

So honestly if it all seems like a bunch of BS to you, you probably understand more than you realize.

Cryn Johannsen said...

@Anonymous 2:45PM

You wrote: "So honestly if it all seems like a bunch of BS to you, you probably understand more than you realize."

That is quite true, and I am glad you made that point. It reminds me of what Matt Taibbi has said in interviews about his book on the Wall Street Scam.