Tuesday, November 27, 2007

Tom Brown: Matt Snowling’s Latest Attack on First Marblehead

But first, a little background. The default-recovery process in private student lending is very, very different than it is in other types of consumer lending. The process can take years. In auto lending, by contrast, when the borrower defaults, the car gets repossessed, and the lender might sell it a few weeks later. The recovery proceeds are in hand before you know it. In mortgage lending, the process takes a bit longer, but isn’t likely to last much more than 18 months.

But student lending doesn’t work that way. In student lending (which is unsecured, don’t forget), experience shows that material recoveries take place over several years following the default. You probably don’t have trouble figuring out why, either. For starters, many delinquent borrowers will eventually apply for a mortgage—the first ones might just four or five years after they graduate--and will want to get that student loan derogatory off their credit files in order to get their loan. Or a borrower’s earnings power will eventually rise (over four or five years, say) to the point where he can service the loan without much financial strain. For whatever reason, recoveries take place over many years. Remember, the loans are not dischargeable in bankruptcy, so there’s never a time when it’s not worth the lender’s time and effort to keep dunning.

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