May 10, 2016

Why FFELP Portfolios Require Getting Under the Hood

Banks have been eager to sell off their sluggish FFELP-backed student loans as heightened regulations have put a squeeze on profits.

It's been a sluggish year for investor demand for federally-backed student loans as a result of sharp declines, but there are signs that this market is starting to heat up again.

If that's the case, banks may start to add Federal Family Education Loan Program (FFELP) loans back on the list of assets to be unloaded. Over the recent past, these types of loans haven't really been the type that banks have been keen on holding on to since they haven't been as profitable as banks would have preferred. Heightened regulations on student lending have certainly tightened the level of profitability that FFELP loans have provided banks.

However, as this market continues to improve, banks may have much more incentive to sell off their FFELP loans. A couple of recent securitizations have instilled some level of confidence in such a possibility.

Recent FFELP Securitizations Show Some Promise in Profitable Sales of Student Loan Assets

Navient Corp. unloaded $1.1 billion in FFELP-backed bonds back in February. In April, the loan servicer sold off a $497 million securitization that attracted excellent pricing. With these large deals being completed, banks are more confident about sales transactions of their FFELP loans. Recent securitization by Navient Corp. have shown promise for banks to unload FFELP loan assets that they've been holding on to until more modest discounts emerge.

Thanks to the reduction of funding costs for FFELP loans, more sellers are expected to come out of the woodworks. Access to affordable funding can help open the doors to more successful and profitable sales of FFELP loans. Buyers are influenced by the costs associated with financing these purchases, so the more affordable funding gets, the easier it will be to find a buyer.

Up until now, many smaller banks have been holding off on selling their guaranteed student loan assets because the price is still too heavily discounted for their comfort level. However, with much more modest price discounts on the horizon, selling FFELP loan assets in the near future might make a lot more financial sense.

But how and when to sell these FFELP loans can be tricky without having an in-depth look at how a specific loan portfolio is functioning. As the price of these government-backed student loans is still quite variable, having a good look under the hood of portfolios is crucial to be able to show potential bidders the value in making a purchase. Expressing the value of these loan assets as favorably as possible will help to maximize the sales price and reach a closed sale.

Analyzing Loan Portfolios to Sell Off Loans at Minimal Discounts

In order to achieve this feat, banks would be well advised to work with an experienced valuation advisor to determine how exactly a portfolio is working. By quickly recognizing inadequate disbursements, a negative impact on the balance sheet can be avoided.

At Garnet Capital, our business surrounds itself in assisting banks and various financial institutions in deeply analyzing their loan portfolios to prudently monitor loan performance. An in-depth analysis of all aspects of a bank's loan portfolio will allow for good governance, as well as identify the right time and temperature for specific loan assets to be sold off. Sign up for our newsletter today to learn more about our vast experience with loan sales.