Student loan asset backed securities (SLABS) are popping up left and right on Wall Street.
But it’s startups, not the established banks, that are set to profit billions.
For the uninitiated, SLABS consist of student loans that have been refinanced and packaged into a large offering.That offering is then cut into pieces and sold to institutional investors, like hedge funds and pension investments.
Startup companies including SoFi to Lending Club are getting in on this action and reaping hundreds of millions of dollars in the process.
Wednesday, SoFi closed a new SLABS offering totaling more than $US400 million. That comes on the heels of a $US100 million SLABS securitization from CommonBond also on Wednesday. Soon, SoFi will announce it has funded $US3 billion in mortgage, student loan refi and personal loans.
The offerings are getting investment-grade ratings from agencies like Moody’s and Standard & Poor’s and boldface name advisers like Goldman Sachs and Morgan Stanley regularly turn up on their deals.
All this comes as the student loan bubble reaches a new high virtually every month and federal estimates are in the $US1.2 trillion to $US1.3 trillion range for the amount of debt the government has issued to students.
More than 10% of those loans could be repackaged as SLABS, Goldman Sachs noted in March. (SLABS are only made up of loans issued to borrowers very strong credit.)
One of the reasons that SLABS have taken off is thanks to the Federal Reserve’s record-low interest rates. This makes it easier for startups like SoFi to borrow the money they need to lend money to people who want to refinance their student loans.
Perhaps most attractive to investors in SLABS is that the debt has to be paid, even if the borrowers declare personal bankruptcy.
This year SoFi has already placed $US700 million in SLABS. The company expects that figure could rise to $US2 billion by the end of 2015. Quarterly SLABS are expected to commence in 2016 and CEO Mike Cagney says SoFi can sell $US4 billion in asset backed securitizations in 2016. Altogether Cagney thinks SoFi can capture a total loan volume ranging from $US13 billion to $US15 billion next year.
The whole business of taking loans and repackaging them as securities scares a lot of people who were burned in the 2008 crises.
But SLABS are a lot different than the securities made out of home loans before 2008. The biggest difference in the companies’ SLABS offerings is where the debt originates. The borrowers are high class borrowers. CommonBond CEO David Klein points out that his average customer has a credit score north of 760 and makes $US140,000 a year. SoFi also says the loans it repackages were also made to highly qualified borrowers.