The recent decline in performance of Sallie Mae's private student loan securitisations is due to the more restrictive forbearance policy introduced in early 2008, says Moody's in a new report. Overall, though, the agency does not expect it to have a material impact on the cumulative losses of Sallie Mae transactions and the changes will therefore have had no impact on their ratings.

Moody's explains that, as the US economy weakened in 2006 and 2007, Sallie Mae applied forbearance more liberally. Starting in early 2008, it implemented several changes to tighten its forbearance policy, leading to fewer and shorter forbearances being granted. Since the forbearance tightening, Sallie Mae's private student loan transactions have seen their delinquency rates and, most recently, default rates rise more sharply than those of the other major issuers.

Moody's avp Tracy Rice says: "We believe that changes in Sallie Mae's forbearance policies account for a significant portion of the differences in patterns between Sallie Mae's performance data and those of the other major issuers. Specifically, the tightening of the forbearance policy and the decline in forbearance rates caused a corresponding increase in delinquency rates, as some borrowers who encountered difficulties making loan payments and previously would have been granted forbearance by Sallie Mae instead became delinquent."

The delinquency rates on Sallie Mae's private student loan transactions rose from 3.7% in Q108 to 9.3% in the Q209. During that period the percentage of loans in forbearance dropped from 16.5% to 4.9%.

The default rate has shown a pattern of increase similar to that of the delinquency rate, but with a lag, explains Moody's. The agency notes that in Q209, the most recent full quarter for which complete data are available, the average default rate for Sallie Mae's transactions jumped by two full percentage points to 5.1%, while the default rate for the other major issuers increased by a much more moderate 0.2%.

Moody's expects Sallie Mae's delinquency rates to stop rising relative to those of the other major issuers in the near term and then to fall a bit relative to the others, and its default rates to follow a similar pattern, but with a longer lag.