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Student Loan Bubble Cracks With Pulled Sallie Mae Bond Deal

Tyler Durden's picture




 

In 2007 a small number of French hedge funds imploded over sudden losses stemming from highly leveraged bets made on the unstoppable subprime mortgage market. At the time, a few saw the writing on the wall; but many simply wrote it off as just another over-levered hedge fund and the subprime mortgage market was 'fine'. Fast forward six years and as we have discussed numerous times (most recently here and here) there is a bubble, potentially far bigger than subprime, in student loan debt. As one of the last remaining outlets for state-sanction credit creation, this is a big deal; but, of course, the popping of the bubble (or even a slight leak) is eschewed since there is so much 'reach for yield' and the Fed's got your back. That is until this week. As WSJ reports, Sallie Mae (SLM), the nation's largest non-government student lender just cancelled a $225 million debt offering as investors  decided they simply were not getting paid enough for risk - amid rising student loan defaults. Simply put, there's a limit to what investors will tolerate.

 

 

SLM was offering a stunningly low 3.5% interest on the deal and investors snubbed it, "There are certain limits that can't, or shouldn't, be crossed if you're an investor," adding that, "we're beginning to see what the tolerances are." This is a significant shift since SLM and other issuers of debt backed by student loans sold $7.8 billion worth of securities this year through last week, up from $5.7 billion in the same period of 2012. With the portion of student borrowers who are late on their debt payments by 90 days or more climbing to 31% in 2012, from 24% in 2008; we wonder if this is the tipping point for the student debt in 2013 that was generally ignored in subprime in 2007, until it was too late.

 

Via WSJ,

Student-loan company Sallie Mae SLM -1.35% canceled a $225 million bond offering on Thursday after about two weeks on the market, according to people familiar with the deal. The move may mark a line in the sand: Investors whose thirst for yield has revived all manner of riskier asset classes decided they weren't getting paid enough to buy at the offered price amid rising student-loan defaults.

 

...

 

Sallie Mae pulled the plug on an offer for $225 million in bonds.

 

The yield hunt has revived the markets for securities backed by troubled mortgage loans and loans to borrowers with less than pristine credit, known as subprime. But even in these markets, there are boundaries.

 

"There are certain limits that can't, or shouldn't, be crossed if you're an investor," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union. "Now we're beginning to see what the tolerances are."

 

Investors were demanding more interest than the 3.5% coupon Sallie Mae was offering on the bonds,...

 

Sallie Mae and other issuers of debt backed by student loans sold $7.8 billion worth of securities this year through last week, up from $5.7 billion in the same period of 2012, according to Bank of America Merrill Lynch data.

 

Securities backed by student loans have become popular for the extra yield they provide over safer debt, despite a significant rise in defaults on such loans. Overall, the portion of student borrowers who are late on their debt payments by 90 days or more climbed to 31% in 2012, from 24% in 2008, the Federal Reserve Bank of New York said in a recent report.

 

In the case of the canceled Sallie Mae offering, rising defaults could have crimped the cash flow of the federally backed loans supporting the new securities, because more defaults would mean less excess, or residual, income after holders of the original loans were paid.

 

...

 

Investors have been buying up securities backed by everything from troubled mortgages to loans to subprime borrowers looking to buy cars. Analysts expect the amount of securities backed by assets sold this year to outpace last year's $197 billion total.

 

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Mon, 04/29/2013 - 09:36 | 3509689 LawsofPhysics
LawsofPhysics's picture

"financial folks will harass and follow you for the rest of your life to continue to squeeze money out of you. "  -  Tell us what happens when there are but a few "financial folks" and no army to back them up.  These fuckers produce nothing of real value.  In order to survive we all need things of real value, things that require real fucking work.  These asshats are going to ruin the good thing they had going by forcing everyone into sharecropping.  Once that occurs, no one will do "bussiness" with them or want to have anything to do with their latest financial "product" or con.  Sounds good to me, fucking bring it.

Mon, 04/29/2013 - 11:19 | 3510100 CheapBastard
CheapBastard's picture

<hound you for life>. is so correct. The guy down the  block woke up a few weeks ago to find his car gone...towed away for a debt he owed 8 years ago...they simply kept renewing the judgment until they found him.....you never escape...I seen it with my own eyes....I am a BELIEVER.

Mon, 04/29/2013 - 12:41 | 3510407 LawsofPhysics
LawsofPhysics's picture

Don't carry any debt moron.  Many of us get by just fine.  The problem is debt, period.

Mon, 04/29/2013 - 09:51 | 3509735 ebworthen
ebworthen's picture

Fuck 'em.

Change address, change phone number.

Why work really; this is a complete Ponzi, if you work you are doing it for someone else.

Think about it.

Mon, 04/29/2013 - 10:12 | 3509784 Rory_Breaker
Rory_Breaker's picture

You can and perhaps you should. But keep this in mind - big brother will find your sorry ass and then it's off to re-educaction camp (prison) for you.

Mon, 04/29/2013 - 09:41 | 3509706 Rory_Breaker
Rory_Breaker's picture

Slightly OT:

My sister wants to apply for master's in Computer Science from a university in the US. I've been telling her to look for other options (like NUS, Singapore or schools in India) as given what I read on ZH and other news sources daily only a fool would willingly commit to borrow for studies and spend the next 4-5 years studying & then working in the USA when things look so ugly.

But her friends, some of whom are part of this years intake, and some who have already finished one year of their course are quite optimistic about the prospects of getting a well paying job and living a good life. Some of my friends, and children of my parents' friends also only see a bright future ahead and are quite happy to make a move to the US. Once of my seniors from college just got her green card two weeks ago!

I'm starting to sound like a maniac for sounding so skeptical about all this and warning them of impending doom.

Mon, 04/29/2013 - 09:47 | 3509717 Bearwagon
Bearwagon's picture

Resist normalcy bias. You are NOT a maniac.

Mon, 04/29/2013 - 10:10 | 3509776 Rory_Breaker
Rory_Breaker's picture

Thanks BW. I still do not understand how I'm going to convince her (and family) that this may end badly. One positive is that she is applying for a course starting in Sep 2014 so I have plenty of time before she pays the course fees and boards the plane.

Mon, 04/29/2013 - 10:42 | 3509894 Bearwagon
Bearwagon's picture

May the use of NLP be of help. Reading suggestion: "The Structure Of Magic" by Richard Bandler and John Grinder. 

http://cdn.preterhuman.net/texts/manuals/magic/The%20Structure%20Of%20Ma...

Mon, 04/29/2013 - 11:49 | 3510229 Rory_Breaker
Rory_Breaker's picture

thanks. i'll check it out :)

Mon, 04/29/2013 - 11:13 | 3510073 aerojet
aerojet's picture

You don't need a master's in CS.  You need to spend the time and learn the material yourself.  I've interviewed dozens of so-called programmers with CS degrees and very few can actually do the work.  The degree isn't a magic bullet--you either have the aptitude for the work and learn it by various means, or you will always suck at it.  The other thing to know about working in the software business is that your scant free time will be eaten up keeping up with what's new or you fall behind and become roadkill.

Mon, 04/29/2013 - 14:43 | 3510806 RKDS
RKDS's picture

Why should they know how to do the work?  Look at the caliber of people getting hired in this industry.  Knowing how to program is a liability because you know what can and cannot be done with given resources.  Ignorant of that, you can promise the moon to some executard who can't tell the difference between it and a horse's ass.

Mon, 04/29/2013 - 09:56 | 3509744 Downtoolong
Downtoolong's picture

O.K. here's the new deal. If the security doesn’t perform as promised you get to keep the collateral, i.e., we designate a recent graduate to move into your basement. You only have to feed and clothe them until they get a job,  then you get a lien on their future Social Security benefits equal to your expenses, all taxable as current income of course.

  

Mon, 04/29/2013 - 10:06 | 3509759 ejmoosa
ejmoosa's picture

You cannot gain title and sell a worthless diploma.  So yes, there is a lot more risk involved.

Mon, 04/29/2013 - 10:16 | 3509796 Aurora Ex Machina
Aurora Ex Machina's picture

But... but... Your University tuition dollars at work. [Perp received a formal ticket for driving in the bike lane - 4 days in the iso cube. For those doubting it, the story is real]

By far the largest growth sector in University costs has been administration, not education by the way; as soon as it became a loan situation, the bureaucratic class mushroomed and started sucking those dollars down.

 

 

Oh, and if you want to know the ending of this particular thematic trend. Look no further.

Mon, 04/29/2013 - 10:26 | 3509827 aerojet
aerojet's picture

Hoping the bubble pops big-time.  I have two kids to put through college, but not at current prices.

Mon, 04/29/2013 - 10:27 | 3509833 syntaxterror
syntaxterror's picture

Why isn't Bubble Ben buying those Sallie junk bonds?

Mon, 04/29/2013 - 11:14 | 3510077 1000 splendid suns
1000 splendid suns's picture

The debt jubilee is coming in the form of one friggen big needle to pop all these bubbles. Stop paying extra on your student loans, car loans, mortgages, second mortgages. Everything will be wiped clean. Instead, load up on tangible assets; PMs, art, classic cars, guitars, guns 'n ammo, land.

Mon, 04/29/2013 - 15:01 | 3510858 Suisse
Suisse's picture

They're going to inflate their way out of this mess, buy equities. 

Mon, 04/29/2013 - 11:44 | 3510205 fran6359
fran6359's picture

What's not mentioned is that of that 7.8 bln in securities that have already been floated, 3.3 bln of that is in April, which was way above the parsley 390 million that was floated in March.  Possbily just a chance that institutional investros had already had their fill of SLABS in April and will be back.

What will happen if the "Bubble Pops" like you're claiming then the excess cash from legacy FFELP loans will go up due to government repayments at the same time the cashflow generated by the portfolio actually in the bond will decrease.

Probably Sallie Mae some how trying to monetize these legacy FFELP Loans that they can't put into securities anymore and Institutional investors realizing that Sallie Mae is taking too big of a spread while only offering 3.5%.

Mon, 04/29/2013 - 15:23 | 3510938 Fepericzer
Fepericzer's picture

Simply put, if they are government-guaranteed, the risk to investors is tiny.  That is what the panicking Asian and European investors didn't understand in winter 2008 when they locked up the world credit markets.  While nothing was as risk-free as they saw things in 2007, nothing, even subprime mortgages, was nearly as risky as they saw things in 2009.  Capital markets are based in large part on psychology.  There is no logic-driven, "invisible hand" there.

Student loan delinquency and default rates dropped over period of two decades ending less than two years ago.  Nothing stopped the relentless improvements, not even three deep recessions.  Student loan performance, at least govt-guaranteed, is largely immune to the macro economy.  The FedResrv is unable to pull the right data in their credit bureau samples.  Credit bureau bureau data may be OK for analyzing automobile loans, credit cards and mortage performance, but they lack the unique data elements present in government student lending.

Mon, 04/29/2013 - 15:40 | 3510989 Thisson
Thisson's picture

That's a bunch of hogwash, for several reasons, including: #1) Student loans are not government guaranteed;  #2) Debts are simply promises to repay, and what cannot be repaid will not be repaid.  A person with $200k in student loans to obtain a nonmarketable masters or PHD is not going to repay their debts, regardless of whether the debt is immune from discharge in bankruptcy. 

Tue, 04/30/2013 - 23:10 | 3516556 Fepericzer
Fepericzer's picture

1. More than 90% of the outstanding dollar balance of education loans (student loans) is either government-guaranteed (FFEL) or actual direct government loans (DL).  All NEW federal loans since June 2010 have been direct but there are still outstanding guaranteed loan balances.  The type of loans discussed in the article are relatively-minor in the big picture.

2. The maximum lifetime borrowing limit for federal student loans is still relatively-modest -- $31,000 for undergraduates.  For undergraduates at least, the area of major is a poor indication of lifetime earning ability.  Students who complete an associates or bachelors degree are extremely-low risk for default because of the type of people they are.  Delinquency and default, even for dropouts, are much lower than the FR estimates, which are based on samples from credit bureau files, which lack the key data points needed for student loan analysis.

Mon, 04/29/2013 - 15:58 | 3511057 Miles Kendig
Miles Kendig's picture

If Bill Gross starts scooping all the SLM out there you will know what's coming next

Mon, 04/29/2013 - 16:30 | 3511185 dizzyfingers
dizzyfingers's picture

Most grads can't find jobs or are offered low-wage jobs. How can they pay? Bailout in 3, 2, 1.

Next, mortgages for those earning $10.00 per hour.

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