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August 21, 2014

FFELP loan sales may be poised to take off

As a result of hitting a critical point in its development, the market for Federal Family Education Loan Program loan sales may soon enjoy a sharp rise in activity.

Banks take a different view
According to Fitch Ratings, banks have refrained from selling their portfolios of federal student loans because they lacked opportunities to reinvest sales proceeds. However, these organizations have started to reconsider as the outlook of their core businesses improve, regulations become more stringent and the interest of prospective buyers increases.

As these fundamentals shift, banks are growing more interested in shedding non-core assets. There may be evidence to back up the company's claim, as CIT Group sold its $3.6 billion FFELP portfolio to Nelnet earlier this year, and Wells Fargo moved its $9.7 billion FFELP loan portfolio to held-for-sale status in the second quarter.

Transactions may signal new normal, says expert
Brendan Sheehy, director of financial institutions at Fitch, weighed in on these transactions, according to MainStreet.

"We believe the announcement from Wells Fargo combined with CIT's portfolio sale last April may signal that banks are more willing to sell these assets," he told the news source. Sheehy stated that "banks tend to view these portfolios as non-core, non-strategic assets given that they are in runoff" because of the Health Care and Education Reconciliation Act.

CIT and Wells Fargo placed in the top 15 largest holders of these federally funded loans as of September 2013, Department of Education figures showed. However, many other banks - and also non-profits - own substantial portfolios of FFELPs. These organizations include Bank of America, JP Morgan, U.S. Bank, Brazos Group, Northstar Guarantee, PNC, Access Group and SunTrust.

Loan sale template
Amid this situation, Fitch Ratings asserted that the recent transactions will provide a template that other banks and non-profits can leverage to sell their portfolios of federally funded student loans.

Financial institutions might find this new template handy as the fundamentals surrounding FFELPs change. Mark Kantrowitz, author of Filing the FAFSA and publisher of educational information provider, commented on the portfolios containing these loans, according to MainStreet.

Portfolios' changing nature
"Most borrowers who default do so within the first four to five years of entering repayment," he told the news source. "So the portfolios have shifted from being an unproven asset to a proven asset, with all the defaulting borrowers removed from the portfolio due to the federal government payment of guarantee claims," until HCERA was enacted in 2010.

Kantrowitz emphasized that as borrowers pay off the amount they owe, the dwindling principal coincides with falling amounts of annual interest, according to the media outlet. As a result of this situation, some banks have an incentive to divest their FFELP portfolios before they become undesirable.

Financial institutions that are interested in selling loans such as these - or buying portfolios containing the securities - might consider contacting Garnet Capitol Advisors, which has significant experience in this space.