Insights & Information
By Timothy Bernstein, Analyst
Of chaos perhaps perhaps perhaps not seen since the crisis that is financial. While Moody’s and Fitch revisit their particular score methodologies for federally-insured education loan asset-backed securities (FFELP ABS), yield spreads have actually skyrocketed. Since July of 2015, spreads do have more than doubled and also have now reached amounts maybe not seen because the post-crisis many years of 2009 and 2010. Although the market anxiously awaits a revised rating framework, this indicates well well worth investigating exactly exactly what caused this environment of insecurity into the beginning.
What exactly is a FFELP Education Loan?
To put it simply, a FFELP Student Loan is that loan that has been made beneath the Federal Family Education Loan Program, a government that is federal (since discontinued) by which personal lenders made loans to pupils. Those loans had been then insured by guaranty agencies and afterwards reinsured by the government that is federal a the least 97percent regarding the defaulted major and accrued interest.
This standard of implied security has typically made FFELP ABS one of many lower-risk people in the customer ABS category. Despite its reasonably low amount of risk, FFELP ABS spreads have steadily widened since July of just last year as Figure 1 shows:
Just exactly What caused the sensed escalation in danger?
To date, this hasn’t really originate from increasing default prices. According to the Department of Education, 2015 saw a reduction in defaults across all sectors regarding the learning education loan market. Considering that the fundamental credit risk of the securities has not yet changed, the spread widening alternatively generally seems to originate with all the doubt around credit history methodology. In July, simply days it rated FFELP securitizations (Note – the spread jump in Figure 1 occurs on July 9 th, the day Moody’s announcement came out) after it placed a large number of tranches of FFELP ABS under review for downgrade, Moody’s announced a proposal to change the way.