Sallie Mae 2008 Annual Report Download - page 174

8. Student Loan Securitization (Continued)
The Company adopted SFAS No. 159 on January 1, 2008, and has elected the fair value option on all of the
Residual Interests effective January 1, 2008. The Company chose this election in order to record all Residual
Interests under one accounting model. Prior to this election, Residual Interests were accounted for either under
SFAS No. 115 with changes in fair value recorded through other comprehensive income, except if impaired in
which case changes in fair value were recorded through income, or under SFAS No. 155 with all changes in fair
value recorded through income. Changes in the fair value of Residual Interests from January 1, 2008 forward are
recorded in the servicing and securitization revenue line item of the consolidated statements of income.
As of December 31, 2008, the Company had changed the following significant assumptions compared to
those used as of December 31, 2007, to determine the fair value of the Residual Interests:
• Prepayment speed assumptions were decreased for all three asset types primarily as a result of a
significant reduction in prepayment activity experienced which is expected to continue into the
foreseeable future. The decrease in prepayment speeds is primarily due to a reduction in third-party
consolidation activity as a result of the CCRAA (for FFELP only) and the current U.S. economic and
credit environment. This resulted in a $114 million unrealized mark-to-market gain.
• Life of loan default rate assumptions for Private Education loans were increased as a result of the continued
weakening of the U.S. economy. This resulted in a $79 million unrealized mark-to-market loss.
• Cost of funds assumptions related to the underlying auction rate securities bonds ($2.3 billion face
amount of bonds) within FFELP loan ($1.7 billion face amount of bonds) and Private Education Loan
($0.6 billion face amount of bonds) trusts were increased to take into account the expectations these
auction rate securities will continue to reset at higher rates for an extended period of time. This resulted
in a $116 million unrealized mark-to-market loss.
• The discount rate assumption related to the Private Education Loan and FFELP Residual Interests was
increased. The Company assessed the appropriateness of the current risk premium, which is added to the
risk free rate for the purpose of arriving at a discount rate, in light of the current economic and credit
uncertainty that exists in the market as of December 31, 2008. This discount rate is applied to the projected
cash flows to arrive at a fair value representative of the current economic conditions. The Company
increased the risk premium by 1,550 basis points and 390 basis points for Private Education and FFELP,
respectively, to take into account the current level of cash flow uncertainty and lack of liquidity that exists
with the Residual Interests. This resulted in a $904 million unrealized mark-to-market loss.
The Company recorded net unrealized mark-to-market losses related to the Residual Interests of
$425 million during the year ended December 31, 2008. The mark-to-market losses were primarily related to
the increase in the discount rate assumptions discussed above which resulted in a $904 million mark-to-market
loss. This was partially offset by an unrealized mark-to-market gain of $555 million related to the Floor
Income component of the Residual Interest primarily due to the significant decrease in interest rates from
December 31, 2007 to December 31, 2008.
The Company recorded impairments to the Retained Interests of $254 million and $157 million,
respectively, for the years ended December 31, 2007 and 2006. The impairment charges were the result of
FFELP loans prepaying faster than projected through loan consolidations ($110 million and $104 million for
the years ended December 31, 2007 and 2006, respectively), impairment to the Floor Income component of
the Company’s Retained Interest due to increases in interest rates during the period ($24 million and
$53 million for the years ended December 31, 2007 and 2006, respectively), and increases in prepayments,
defaults, and the discount rate related to Private Education Loans ($120 million for the year ended
December 31, 2007). In addition, the Company recorded an unrealized mark-to-market loss under
SFAS No. 155 of $25 million for the year ended December 31, 2007.
F-54
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)