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SecondMarket Director Mike Moro on investing in the rise in student-loan-backed securities investing.
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The amount of outstanding student debt is nearly one trillion dollars it's staggering and a recent report from the Fed shows -- more borrowers are falling behind on their payments yet.
The investors' appetite for student loans is soaring as well joining me now is Michael Moore he's feeding -- appetite -- second market director.
To discuss why investors are piling in the suit what's gonna say thanks for coming into -- all right this is a high stakes game we don't -- to fully investors out there in.
Just to put that in focus on the restaurant a couple of figures virtual 31%.
Of student loan payments or at least ninety days late this was in the fourth quarter 2012.
That's up from 24%.
In 2008 that's about a 30% rise as you can see.
Not the same time dealers.
Sold five point six.
Billion dollars worth of securities.
Based on these student loan debts eyes and it debts that as we -- see you are going up in terms of what is paid and unpaid -- why should we might not be worried that.
About these securities kind of in the same way we started getting worried of the sub prime securities back about 45 years ago.
Absolutely what -- what I think is important to note is the bulk of the five point six billion that you mentioned are still government backed student loans.
-- so they are at least 97% guaranteed -- principal by the federal government so should a borrower default.
And the investor is still likely to get the bulk of his money back.
OK let me -- let me just be a little more specific -- 90% of all student loans -- given by the government that's -- and the government doesn't check credit -- most of -- -- right that's -- Sallie Mae which is the private -- for student -- does do that -- do you sell securities based on the Sallie -- loans which are more -- more creditworthy.
I think we.
What it here second market what we do was we treat both government backed bonds as well as -- private student loan backed bonds.
Now what you're referring to is a private student loans which are only given to high quality borrowers.
Most of them have co borrowers -- believe 95% are co borrowers fight those scores -- north of 700.
And they do other crap out credit underwriting -- such as debt to income ratios so they only give loans to borrowers -- are not likely to default -- so there are there is some safety.
Little over one more caveat before we get to the benefits of these things is there are feeling that no matter what happens the government's gonna bail out these loans if they go back.
I think that the bulk of the student loans that are currently outstanding roughly 815 -- 900 billion.
Of the trillion that's often quoted in terms of student loan -- is either backed by the federal government or is on the federal government.
-- -- -- -- that brings us back to the sub prime mess which which we were told the same thing these things there's no risk of these things his eventually the government will back up what little was brought down that.
The whole financial system.
I believe the exposure is obviously significant.
It's going to be pass north of trillion dollar shortly.
-- and should a situation continue like this -- -- loan performance continues to fall behind yes -- the government will have to figure out a solution.
Those were a lot of caveats might before guided the YouTube being a salesman know why should I want these -- -- fixed income yes and I met a safe they're closer to retirement -- to -- to doing my hot trading in the stock market wonder -- want these bonds are.
Primary concern is obviously principal loss on the and the federal back loan bonds art you don't really have that worries from a credit perspective.
-- Sallie -- credit underwritten loans are obviously going to -- don't have the government guarantee.
But they are only given to good borrowers so the loss of credit.
-- -- -- principle rather on these bonds I would say is not as great.
That's on the since this -- -- -- -- which would you prefer because you do have this choice is kind of hobson's choice -- -- you -- the government bonds that -- -- -- risk because they don't -- credits search -- but they may be backed up by government guarantees -- or Sallie Mae's bonds which are better credit risk him because they only they only lend money to people that are good credit risk which would you rather have.
I think it it all depends on your your risk appetite obviously the Sallie Mae bonds offering more yield even though they're going to how much are -- Right now difference differentials about sixty S seventy basis points annually.
On the other coupon on on the -- so there is a difference is a premium to securitize and privacy -- not so from these bonds we gotta have this last question if it folks searchers trying to figure how much they get from this it's wide war plots right susteren so tell me exactly how much I would -- -- -- -- thousand I bought a thousand dollars worth of these bonds.
How much would I be getting.
So the most recent Sallie Mae private student loan transaction was priced -- believe a couple of weeks ago.
The weighted average was Libor plus 110.
So one point 1% on top of Libor which -- nowadays would be how markets are very little Libor is very wells at one point 31 point -- but still for a fixed income investors searching for any kind of yield at all zero interest rates.
This is a good bet for it absolutely does it does remain an attractive option for many investors Mike Moore from second market good to see you -- thank you very much list.
