Student Loan Securitization: Now You Can Short Student Loans!

mikesswimn's picture
Rank: Neanderthal | 2,310

Morning Monkeys,

Ever wondered how you can get in on the student loan bonaza? Well, so did SecondMarket which, the WSJ reports, has done exactly that by building out a platform that allows lenders to issue securities backed by student loans directly to investors. The article notes that since 2008, SecondMarket has traded roughly $6 billion, but given the current size of the student loan marke, over $1 trillion, there's plenty of room to grow.

Some of you may recognize SecondMarket as the firm who provided the market for the trading of Facebook shares prior to its IPO. And others may be rich enough to know SecondMarket for their wine, fine art, diamonds, intellectual property and other so-called alternative assets. Nevertheless, this is a very interesting move on behalf of SecondMarket that could yield incredible results.

Now, at this point, you may be wondering, is this guy pitching SecondMarket? No, I'm not, but I'd be lying if I didn't say that I found them interesting, to say the least. What I'm suggesting is that this is a fun filled chance to short the hell out of other people's career dreams! Sadly, we won't have complete access to the host of geniuses out there who think their MFA in finger painting will get them paid more than the homeless guy pan handling outside of McDonalds:

Issuers will be able to sell securities backed by private student loans, which aren't guaranteed by the federal government, as well as older federally backed student loans known as Federal Family Education Loan Program (FFELP) loans. They also will be able to distribute servicing reports through the new platform, said Mr. Silbert.

Slightly disappointing to say the least because, I hear, all these "private" providers of student loans do some semblance of underwriting. Still, a very exciting chance get into an absolutely massive asset class.

What do you monkeys think? Is this a market you'd get into? If so, what kind of positions do you think you'd take and why?

Comments (27)

Mar 6, 2013

would love to short, they will prob put regulations against it

Mar 6, 2013
Mar 6, 2013

Can I short myself? Because I'm really racking up the debt with a BBA and JD/MBA.

Mar 6, 2013
CountryUnderdog:

Can I short myself? Because I'm really racking up the debt with a BBA and JD/MBA.

That's justified since you're at a target getting a very useful degree. Somebody studying philosophy at a liberal arts school is just dumb.

Mar 6, 2013

I would never short the student debt issued by private companies. It's overwhelmingly co-signed, high credit rating debt for students attending colleges with the highest tuition rates.

Mar 6, 2013
NorthSider:

I would never short the student debt issued by private companies. It's overwhelmingly co-signed, high credit rating debt for students attending colleges with the highest tuition rates.

Would you sell some protection then? I'm sure there's some money to be made selling CDS contracts on this debt if what you say turns out to be correct.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Mar 6, 2013
mikesswimn:
NorthSider:

I would never short the student debt issued by private companies. It's overwhelmingly co-signed, high credit rating debt for students attending colleges with the highest tuition rates.

Would you sell some protection then? I'm sure there's some money to be made selling CDS contracts on this debt if what you say turns out to be correct.

At the right price I would!

Mar 6, 2013

If they disclosed what majors you were pursuing with the loan i'd be interested.

    • 1
Mar 6, 2013
Addinator:

If they disclosed what majors you were pursuing with the loan i'd be interested.

1. Long engineering/accounting.
2. Short psychology/communications.
3. Wait...
4. Make Richard Branson a buyout offer for Necker Island.

Please don't quote Patrick Bateman.

Mar 6, 2013

NorthSider is right about not shorting private student loans, the default/delinquency rate is drastically different from government backed student loans. The following is taken from an article in forbes money builder yesterday:

The study also shows the disparity between federally backed student loans-those guaranteed by the government-and private student loans. Between 2007 and 2012, federal loan balances jumped 97% while private loan balances only rose 4%. During that time, federal student loan delinquencies rose 27%, while private loan delinquency rates actually dropped 2%. The delinquency rate for federal loans was 12.31% as of March 2012 while it was only 5.33% for private loans.

Mar 6, 2013

this seems like a really bad idea...serious potential though. It will probably get scrutinized highly though. "Predatory lending" is now on the debt consumers mind (or it should be) so maybe they'll be more cognizant of what they're signing

Mar 6, 2013
dkim1984:

this seems like a really bad idea...serious potential though. It will probably get scrutinized highly though. "Predatory lending" is now on the debt consumers mind (or it should be) so maybe they'll be more cognizant of what they're signing

The only group practicing "predatory lending" is run by Uncle Sam.

Mar 6, 2013
NorthSider:
dkim1984:

this seems like a really bad idea...serious potential though. It will probably get scrutinized highly though. "Predatory lending" is now on the debt consumers mind (or it should be) so maybe they'll be more cognizant of what they're signing

The only group practicing "predatory lending" is run by Uncle Sam.

Be realistic dude. I've run into about 3 former employees of country wide AND fannie mae, and it seems to me even the originators knew they were handing out questionable mortgage loans

I'm not saying it's the banks fault, but I'm also not saying they aren't involved

Consumers should have known better to read the fine print, originators shouldn't have handed out money they weren't responsible for (ultimately with exception to equity tranche ABS CDO), and government should have kept a closer eye

Calm down

Best Response
Mar 6, 2013

I talked pretty extensively with Patrick about this one random day--was actually going to do a write-up on it, but have been getting pretty slammed with work recently. How to trade this piece is an interesting discussion.

As has been mentioned above, shorting privately backed student loans would not be the same as shorting the student loan bubble, provided you believe such a thing exists. We know education costs are outpacing inflation. We know mortgage loan debt burden is the only outstanding volume currently higher than student loans. Bubbles present opportunities for massive profit, but timing is everything. My current thesis for how to do it best is a long NNI - short SLM pair trade.

As of the end of 2012, there is over $1 trillion in student loan debt outstanding (federally backed), which is even more than national credit card debt. This might not be significant in and of itself. However, delinquency rates (90 days late or more) too have skyrocketed in the past eight years alone, especially amongst those who are thirty years and younger--hard to imagine, but the wave of freshly minted FUPA Studies in 18th Century Russian Literature majors are having trouble finding jobs to support their organic coffee consumption and otherwise esoteric interests. According to the FRBNY, the proportion of 25-year-olds with student debt has increased from just over 25% in 2004 to more than 40% in 2012, and delinquency rates amongst those has risen from 21% to 35% since 2004. Education costs are increasing, while the value received post-graduation is shrinking, or staying the same at best.

http://moneymorning.com/2013/03/05/the-scary-reali...

So, the question is, how do you short a bubble backed by the government's guarantee?. If you look at SLM (Sallie Mae Corp), you'll see that in spite of exploding loan volume, there is relatively little price volatility; in fact, it's priced at almost identical levels as it was five years ago. The PEL (private education loan) segment of their portfolio is where I see bearish opportunities emerging, however. These lending arms provide to students with poorer credit attending untraditional schools, like ITT Tech and whatnot. PELs constitute ~25% of the total student loan market right now, and will only grow as profit is needed to support their federally insured portfolio. Essentially, if SLM wants to maintain or grow profits, it will have to assume more risk. Again, this is where timing is key; it's a bearish play on the overall economy, and it's unlikely the Fed will allow rates to increase much (in their own statements, SLM hypothesized a $2.5B loss to their portfolio given a 100 bp increase).

That's where NNI comes in. Nelnet is an education services company that has become instrumental in the student loan game, and functions as a loan servicer, payment processor, loan financer, and enrollment servicer in the US. It has university branches set up all across the country so students can get their payments in on time, yada yada--it has a large portfolio of FFELP loans but does not make private loans, and mostly functions as a back-end assistant to the banks like Wells Fargo, etc. Thus, as students take out more loans, their margins increase alongside volume. However, because it's mostly their servicing and consultation-like services and software that draw universities to pay, they have limited downside to a bubble-burst scenario.

Keep in mind, NNI is simply a hedge to the industry-specific risk in my mind. I'm sure yall have your ideas as well, and I'd be interested to hear them. Disclosure: I have no positions nor plans to execute positions in any of the stocks mentioned in the next 72 hours, as my money is currently tied up with a Nigerian Prince.

    • 3
Mar 6, 2013

*good

Mar 6, 2013

The emotional safety of this thread has been severely compromised

Mar 7, 2013

Seems like a waste of time until the government allows you to declare bankruptcy on student loans without having to go to great lengths (court has to rule that it would be an undue hardship on you and your dependents). So the loans currently persist through bankruptcy, and as previously noted, the loans are government backed and co-signed (although either of those are thin guarantees as we've seen).

Mar 10, 2013
Comment