the following is an interesting development. http://www.bloomberg.com/apps/news?pid= ... refer=home
Wall Street Wants Student Debt as Collateral for Fed (Update1)
By Sarah Mulholland
April 7 (Bloomberg) -- Wall Street is pressing the Federal Reserve to take bonds backed by student loans as collateral in its new lending facility to stem a slump in demand for the debt that's driving lenders to stop writing loans.
The American Securitization Forum and the Securities Industry and Financial Markets Association asked for acceptance of AAA rated securities in an April 2 letter to the Federal Reserve Board and the Federal Reserve Bank of New York.
The lobbying effort follows the central bank's willingness to take on more mortgage-related debt to unfreeze the market for asset-backed securities. Student loan companies are paying more to raise money as investors shun the securities, after a collapse of credit markets last year that began with record losses on subprime-backed debt. CIT Group Inc., NorthStar Education Finance Inc. and Brazos Higher Education Service Corp. are among companies that suspended new originations.
``There is a big concern among a lot of originators that there will not be enough capital available for all eligible students to receive government-subsidized loans,'' Tom Deutsch, deputy executive director of the American Securitization Forum said in a telephone interview today from New York.
The Term Securities Lending Facility was created last month by the Fed to pump money into financial markets by extending credit to primary dealers of U.S. government debt.
Stopped Writing Loans
Among the collateral it accepts are AAA rated private label residential and commercial mortgage backed securities as well as collateralized mortgage obligations not on review for downgrade and backed by Fannie Mae, Freddie Mac or government agency Ginnie Mae, according to a chart on the New York Fed's Web site.
``We don't have anything, beyond what's already out there, to say about the collateral,'' New York Fed spokesman Andrew Williams said.
At least 40 lenders have ceased writing some form of student loans as the cost of raising money in the asset-backed market has skyrocketed, according to a report from UBS AG. Sales of bonds backed by student loans have dropped 65 percent this year compared with the first quarter of 2007, the analysts led by Laurie Goodman in New York said.
Legislative changes enacted last September increased the costs for student loan companies to originate new loans under the Federal Family Education Loan Program. More than 85 percent of loans originated under the program were financed in the asset-backed market, according to the letter from the securities groups.
About 6.7 million students and parents are expected to apply for a loan under the program in coming months, the letter said, noting that three-quarters of all student loan volume is originated between April and September.
Bonds backed by student loans are losing value for the first time since at least 1999 as competing investments offer higher yields and banks tighten terms on lending against the securities.
Securities with student loans as collateral have fallen 4.2 percent this year after recording their first back-to-back monthly decline in February and March, according to a Merrill Lynch & Co. index of 186 issues from Reston, Virginia-based SLM Corp. that began nine years ago.