In our previous post, we described the Current Second Lien Balance field, which is one of over 2,000 fields in the new Experian Mortgage Loan Performance (MLP) dataset. We showed that the Current Second Lien Balance field meets our three-pronged materiality standard for new data delivery:
New: Provides information not available in existing datasets (i.e., orthogonal to currently available data).
Material: Impacts a sizeable portion of the MBS universe.
Significant: Differentiates collateral performance by a large enough margin to influence trading and risk management decisions.
In this article, we discuss another field that satisfies the above criteria: Student Loan Balance. We evaluate this field in the context of these criteria. First, however, we provide a summary of the MLP dataset and how it compares to standard GSE loan-level data available today.
Standard GSE Data vs. Experian Mortgage Loan Performance (MLP) Data
The MLP dataset contains thousands of fields describing mortgage performance from each borrower, loan, and property perspective, all refreshed monthly (including, amongst other things, new credit scores and refinance inquiry activity, loan performance, filed junior liens, and AVM values). MLP differs from loan-level data provided by Freddie Mac, Fannie Mae, and Ginnie Mae, which the vast majority of market participants solely rely on, in a number of ways:
Standard data provided by the GSEs and GNMA does not contain all the information necessary for accurate forecasting of mortgage prepayment and credit performance. Basic, critical fields like borrower’s current credit score and current junior liens on the property are missing.
The new Mortgage Loan Performance (MLP) dataset from Experian contains borrower, loan, and property data fields covering the entire mortgage universe, including Agency, Non-Agency, and Esoteric mortgage products (CES, HELOC, Reverse), both securitized and non-securitized.
MLP enables full three-dimensional (borrower + loan + property) tracking with persistent keys for borrower (before and after refinancing), loan (in securities/deals even after exit due to payoffs or buyouts, including before and after MSR sales), and property. This enables end-to-end analysis of each borrower’s (and property’s) mortgage experience throughout their credit lifecycle.
New, Material and Significant Field: Student Loan Debt
MLP contains a number of fields describing each mortgage borrower’s student debt load, including amounts in repayment, forbearance and collections; estimated interest rate, time remaining until forbearance expiration, and more. In the interest of simplicity, for this article we’ll focus on a single student loan-related field within MLP: Student Loans Balance, which is defined as the total balance on open non-deferred student trades reported in the last 3 months.
Is Information Regarding Student Loans New to Markets?
Standard loan-level data disclosed by the GSEs and GNMA contain no student-loan-specific fields. Theoretically, fields related to DTI at origination might capture some aspect of student loan debt. So, in the best-case scenario for an investor relying solely on standard disclosure, a DTI value as of origination is provided -- yet is never updated as the loan seasons and the borrower’s debt and income change (see more here). But in the case of federal student loan debt attached to mortgages originated from early 2020 to late 2023, the level of detail provided by disclosure may be even more unknown due to COVID-era repayment and reporting moratoriums.
The student loan repayment moratorium was a temporary federal policy that paused required payments, set interest rates to 0%, and suspended collections on most federally-held student loans. The moratorium began in March 2020, with payments resuming in October 2023, making it approximately 3.5 years in duration—the longest consumer credit payment pause in U.S. history. (Source: NCUA )
During the moratorium, student loan-related debt loads may have been understated as federal loans were in a temporary state of $0 repayment. As an alternative to leaving student loan debt completely out of DTI calculations, an imputed payment equal to only 0.50% of the outstanding balance was often used as a placeholder for a borrower’s DTI calculation.
As the Wall Street Journal recently reported, a new report from the Federal Reserve of New York shows a rise in student loan default rates by age group. Student loan delinquencies have been broadly trending higher across all age groups. Also, the average age of a borrower in default has risen to 40, and borrowers age 50 and older are now at a higher risk of default than younger groups. This 40 to 50-year-old age group represents prime home ownership years.
Defaulted borrowers are also struggling to make other debt payments, too.
The same report stated that almost 40% of past due student loan borrowers with auto loans are past due, 56% have at least one credit card past due, and 20% have a past due mortgage. In addition to increased delinquency risk on their mortgage, borrowers with student loan debt also have fewer mortgage refinance options, as their elevated DTI may prevent qualification for a refinance, or increase the offered rate of a refinance and thereby reduce their incentive. These dampening effects of student loan debt on mortgage CPR are clearly evident in the data, as described further below.
Standard data only reports information related to the primary mortgage and does not include any details on the borrower’s other debts, with the exception of DTI at origination, which is never updated throughout the life of the loan. In contrast, MLP provides a comprehensive view of the borrower’s full credit profile, including other obligations such as credit cards, mortgages on other properties, student loan balances, and much more.
Is Student Loan debt material to the residential mortgage market?
Approximately $11 trillion of residential mortgage loans were originated during the student loan payment moratorium (Source: Experian MLP Dataset), a period marked by historically low mortgage rates during the COVID era. As discussed above, DTI data contained in standard market disclosure may be particularly inaccurate for these loans.
As the Wall Street Journal recently reported, a new report from the Federal Reserve of New York shows a rise in student loan default rates by age group. Student loan delinquencies have been broadly trending higher across all age groups. Also, the average age of a borrower in default has risen to 40, and borrowers aged 50 and older are now at a higher risk of default than younger groups. This 40 to 50-year-old age group represents prime home ownership years.
Defaulted borrowers are also struggling to make other debt payments, too.
The same report stated that almost 40% of past due student loan borrowers with auto loans are past due, 56% have at least one credit card past due, and 20% have a past due mortgage. In addition to increased delinquency risk on their mortgage, borrowers with student loan debt also have fewer mortgage refinance options, as their elevated DTI may prevent qualification for a refinance, or increase the offered rate of a refinance and thereby reduce their incentive. These dampening effects of student loan debt on mortgage CPR are clearly evident in the data, as described further below.
Of today’s $13 trillion in outstanding mortgage debt, more than 10% of that debt ($1.5 trillion) is associated with borrowers who carry student loan debt. For these borrowers, the average amount of student loan debt outstanding is approximately $50,000, versus a mortgage balance of approximately ~$289,000. In other words, the average student loan debt balance is almost 20% of the mortgage balance for the average borrower who carries both. For this set of borrowers, the average monthly payment is approximately $400 for student loan vs. approximately $2,200 for 1st lien mortgage—so that monthly student loan payments are a significant debt load, approximately 20% of the monthly mortgage payment. (Source: Experian MLP Dataset)
Is the effect of student loan debt a significant driver of performance?
Figure 1 illustrates prepayments by student loan balance for a sample of loans drawn from MLP. The chart illustrates that borrowers with larger student loan balances prepay much more slowly, likely because some are effectively locked out of refinancing once student loan payments resume due to elevated DTI. The debt-to-income (DTI) ratio calculated using actual student loan payments may be significantly higher than the DTI calculated during the moratorium, in some cases exceeding GSE eligibility thresholds.
As illustrated in Figure 1, for in-the-money (ITM) collateral, the differential between loans with material student loan balances (greater than $200,000) and loans with no student debt can reach up to 5 CPR. Notably, even for out-of-the-money (OTM) collateral, loans with student debt prepay 1 to 3 CPR slower, likely reflecting reduced mobility due to tighter financing constraints when purchasing a new home.
Pools with otherwise similar prepayment characteristics may exhibit different prepayment behavior depending on the distribution of student loan exposure within their collateral. In addition, because loans with student debt tend to prepay more slowly, this effect increases over time due to burnout: loans without student debt prepay and exit the pools more quickly, leaving a higher concentration of slower-paying loans behind. Given that 10% of the $13 trillion outstanding mortgage market is associated with borrowers who have student loans (Source: Experian MLP dataset)—and that student loans have a meaningful impact on prepayments—many pools issued between March 2020 and October 2023 may be subject to this student loan debt CPR throttle, and therefore mispriced by investors relying exclusively on standard market data.
Fig 1. Prepayment S-Curve: Student Loans Balance
Source: Experian MLP dataset hosted on IVolatility Data-Driven Platform
_____________________________________________________
Michael Pyatski advises MBS traders, portfolio managers, quants, risk managers, loan originators, and technology professionals on making informed, data-driven business decisions that drive revenue growth, enhance risk management, and reduce trading costs.
With more than 15 years of experience as an Agency RMBS trader—including serving as Head of the Proprietary Trading Desk at BNP Paribas—Michael developed and successfully implemented relative-value, data-driven profitable trading strategies to capture market opportunities embedded in data but not fully priced by the market. His trading experience, combined with a Ph.D. in econometrics, led him to found the Data-Driven Portal (https://datadrivenportal.com/), a platform that provides advanced technology for MBS trading and risk management.
The platform’s No-Model Data-Driven technology leverages big data, econometric analysis, and AI to help traders identify relative-value opportunities in RMBS markets and generate above-market, risk-adjusted returns.
_____________________________________________________
