Sallie Mae 2008 Annual Report Download - page 175

8. Student Loan Securitization (Continued)
The following table reflects the sensitivity of the current fair value of the Residual Interests to adverse
changes in the key economic assumptions used in the valuation of the Residual Interest at December 31, 2008,
discussed in detail in the preceding table. The effect of a variation in a particular assumption on the fair value
of the Residual Interest is calculated without changing any other assumption. In reality, changes in one factor
may result in changes in another (for example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might magnify or counteract the sensitivities. These
sensitivities are hypothetical, as the actual results could be materially different than these estimates.
(Dollars in millions)
FFELP
Stafford/PLUS
Loan Trusts
(5)
FFELP
Consolidation
Loan Trusts
(5)
Private Education
Loan Trusts
(5)
Year Ended December 31, 2008
Fair value of Residual Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250 $ 918
(1)
$ 1,032
Weighted-average life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 yrs. 8.1 yrs. 6.4 yrs.
Prepayment speed assumptions
(2)
Interim status ...................................... 0% N/A 0%
Repayment status .................................... 2-19% 1-6% 2-15%
Life of loan — repayment status ......................... 12% 4% 6%
Impact on fair value of 5% absolute increase . . . . . . . . . . . . . . . . . $ (23) $ (151) $ (158)
Impact on fair value of 10% absolute increase . . . . . . . . . . . . . . . . $ (41) $ (265) $ (282)
Expected credit losses (as a % of student loan principal)......... .11% .23% 5.22%
(3)
Impact on fair value of 5% absolute increase in default rate . . . . . . . $ (5) $ (7) $ (207)
Impact on fair value of 10% absolute increase in default rate . . . . . . $ (10) $ (14) $ (413)
Residual cash flows discount rate .......................... 13.1% 11.9% 26.3%
Impact on fair value of 5% absolute increase . . . . . . . . . . . . . . . . . $ (27) $ (158) $ (132)
Impact on fair value of 10% absolute increase . . . . . . . . . . . . . . . . $ (49) $ (275) $ (235)
3 month LIBOR forward curve
at December 31, 2008 plus contracted spreads
Difference between Asset and Funding underlying indices
(4)
Impact on fair value of 0.25% absolute increase in funding index
compared to asset index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (46) $ (173) $ (3)
Impact on fair value of 0.50% absolute increase in funding index
compared to asset index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (92) $ (346) $ (6)
(1)
Certain consolidation trusts have $3.3 billion of non-U.S. dollar (Euro denominated) bonds outstanding. To convert these non-U.S.
dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with certain counterparties.
Additionally, certain Private Education Loan trusts contain interest rate swaps that hedge the basis and reset risk between the Prime
indexed assets and LIBOR index notes. As of December 31, 2008, these swaps are in a $959 million gain position (in the aggregate)
and the trusts had $716 million of exposure to counterparties (gain position less collateral posted) primarily as a result of the decline
in the exchange rates between the U.S. dollar and the Euro. This unrealized market value gain is not part of the fair value of the
Residual Interest in the table above. Not all derivatives within the trusts require the swap counterparties to post collateral to the
respective trust for changes in market value, unless the trust’s swap counterparty’s credit rating has been withdrawn or has been down-
graded below a certain level. If the swap counterparty does not post the required collateral or is downgraded further, the counterparty
must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that has the
required credit ratings. Ultimately, the Company’s exposure related to a swap counterparty failing to make its payments is limited to
the fair value of the related trust’s Residual Interest which was $613 million as of December 31, 2008.
(2)
See previous table for details on CPR. Impact on fair value due to increase in prepayment speeds only increases the repayment status
speeds. Interim status CPR remains 0%.
(3)
Expected credit losses are used to project future cash flows related to the Private Education Loan securitization’s Residual Interest.
However, until the fourth quarter of 2008 when it ceased this activity for all trusts settling prior to September 30, 2005, the Company
purchased loans at par when the loans reach 180 days delinquent prior to default under a contingent call option, resulting in no credit
losses at the trust nor related to the Company’s Residual Interest. When the Company exercises its contingent call option and pur-
chases the loan from the trust at par, the Company records a loss related to these loans that are now on the Company’s balance sheet.
The Company recorded losses of $141 million, $123 million and $48 million for the years ended December 31, 2008, 2007 and 2006,
respectively, related to this activity and specialty claims. For all trusts settling after October 1, 2005, the Company does not hold this
contingent call option.
(4)
Student loan assets are primarily indexed to a Treasury bill, commercial paper or a prime index. Funding within the trust is primarily
indexed to a LIBOR index. Sensitivity analysis increases funding indexes as indicated while keeping asset underlying indexes fixed.
(6)
In addition to the assumptions in the table above, the Company also projects the reduction in distributions that will result from the
various benefit programs that exist related to consecutive on-time payments by borrowers. Related to the entire $2.2 billion Residual
Interest, there is $221 million (present value) of benefits projected which reduce the fair value.
F-55
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)