Down the SLABbit Hole Part 5: The Federal Reserve/ TALF Measures, The Link Between SLABS and 401Ks, and how IBR Plans Relate To The Housing Market.
Welcome back to yet another SLABS DD. At this point, I'm not even surprised I'm writing this. Just when I think I've sufficiently covered this stuff, your guys' DMs and comments lead me down yet another path. So thank you for continuing to give me leads. You are all what makes this possible!
As always, you can read Part 1 (https://www.reddit.com/r/Superstonk/comments/ros6ii/student_loan_asset_backed_securities_slabs_the/) , Part 2 (https://www.reddit.com/r/Superstonk/comments/rp585d/the_slabs_rabbit_hole_part_2_conflicts_of/), Part 3 (https://www.reddit.com/r/Superstonk/comments/rpcyt6/the_slabs_rabbit_hole_part_3_revenge_of_the_slab/) , and Part 4 (https://www.reddit.com/r/Superstonk/comments/rpu2eq/the_slabs_rabbit_hole_part_4_return_of_the_slab/) before this one. You can read my DD about Auto Loan Asset Backed Securities (ALABS) here (https://www.reddit.com/r/Superstonk/comments/rqle93/the_big_short_again_auto_loans_bubble_edition/).
Like I did in Part 2, I'd like to start out with addressing some shortcomings of my previous DDs.
I've gotten a lot of comments about how all of this relates to GME so I'd just like to clarify this link a little further. Like I showed in my original DD, these SLABS were considered very strong collateral due to how difficult it was to discharge them, and the fact that federal student loans are ensured to some extent by the government. I also pointed out in Part 3 how this ties into RRP - RRP being insanely high shows that everyone is desperate for collateral. Both of these reasons led me to assume that SLABS were being used extensively as collateral throughout the market. But, as I've shown in these last few DDs, I believe that the value of these SLABS has been drastically lowered by a number of different recent factors. What does this mean for GME? Well, if all of the sudden a ton of collateral is suddenly devalued, banks may start to get scared and thus will raise margin requirements. This would lead to increased margin calls (which may effect our beloved gaming retailer), and would lead to larger market selloffs that would further effect the abilities of these funds to can-kick. In short (pun intended), SLABS devalue = Banks Freak Out = Banks Raise Margin Requirements = Margin Calls = Moon. Hopefully this clears up why I believe these posts are relevant in this sub.
Another shortcoming that I failed to address was how collateral works with these loans. We know that there is no physical collateral for student loans - like I said, you can't repo a gender studies degree. So, what do they use for collateral instead? Well, two things: federally backed loans have the collateral of government-ensured coverage, and both federal and privately backed loans have the collateral of future payments. However, I believe that both these forms of collateral are much weaker than the collateral in 2008, which was the physical house. The collateral of the government ensuring payment is, in my opinion, weak. The government is already trillions of dollars in debt. If suddenly a large percentage of people with student loans decided to default, the government would be responsible for covering VAST amounts of money. Not only would this affect taxpayers, but could effect inflation as well. I also believe that the collateral of future payments or a portion of income is a weak one. There are several ways to get out of paying this collateral. First, you can discharge the loan entirely. This previously was difficult, but under that new court case I mentioned in Part 2, I believe that this has gotten much easier. Second, you can consolidate your student loans into a single loan. This increases your interest rate, but allows you to take advantage of IBR, or Income based Repayment. Sound familiar? I mentioned this in my Part 1 DD. But basically, IBR has exponentially increased since 2008 and has a severe downside of increased default risk. Not a great thing to use as collateral in my opinion. Plus, if you don't repay your loan in full after 20 years, the remaining debt is completely forgiven. Hmmm. Also doesn't sound like very strong collateral.
And finally, a helpful commenter pointed out that the court case that challenged the previously stringent discharge requirements has been in contention still. So, take with a grain of salt that discharging loans will become easier. The courts are still fighting that one out.
I believe that's all the corrections I wish to make until this point. Let's continue with Part 5.
The first thing I'd like to talk about is the Federal Reserve's part in this whole saga via their recent TALF measures. TALF stands for Term Asset-Backed Securities Loan Facility. This was established on March 23, 2020, as a response to the Covid-19 pandemic. Essentially, this was a subsidy paid to holders of SLABS. The official report reads, "Under the TALF, the Federal Reserve lent on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve lent an amount equal to the market value of the ABS less a haircut and was secured at all times by the ABS." Woah! The FED is basically paying for more SLABS to be created. This is a damn big discovery that I hadn't even considered until it was pointed out by u/PureCiasad. Thanks man! And even though they only paid out to AAA-rated holders, I've already talked about how the ratings agencies are corrupt in a way similar to 2008 where they will basically rate anything AAA. Yikes. The FED is literally creating a bubble right under everyone's noses.
The next thing I'd like to talk about are how now student loans are being linked to retirement savings. Thanks to u/Skomponop for pointing this one out. Basically, some lawmakers proposed a law that would allow businesses to contribute to their employees' 401Ks if you paid off your student loans. Here's a quote from this article that explains it further: "Keller and other lawmakers have focused on one particular provision: linking retirement savings to student loan debt. The idea is to allow businesses to contribute to employees' retirement accounts when workers make their student loan payments. In other words, if you put $100 towards your student loan, your company could “match” it with up to $100 going into a retirement plan like a 401(k)." In my opinion, this is just another way to encourage people to take out as many student loans as possible. And we all know that the more student loans there are, the more SLABS there are which makes these guys money. This could encourage people that may not be in a great position to repay their loans properly to take out student loans anyways just to start filling up that retirement fund earlier. In my opinion, this will devalue SLABS, because again you have these theoretically pretty shitty loans being rated as AAA and used as collateral or sold.
Finally, I'd like to talk more about IBR and how it relates to the housing market. Like I explained in Parts 1 and 2, IBR payment plans look better on paper, but since a smaller percent of the principal loan is paid, interest can accrue drastically over time and can actually make these plans more expensive in the long run, causing increase risk of default or discharge. Well, one of the major barriers to taking out an IBR payment plan for student loans was because previously, it was very difficult to get a housing loan or mortgage while paying off student loans via IBR. This is because lenders were unsure whether to calculate debt to income ratios using the payments under the IBR plan, or to have a fixed ratio. This lead to pretty stringent requirements for taking out a housing loan while paying off IBR student loans. However, these guidelines have been recently updated. Let's take a look at this source. "For loans not in active repayment (forbearance, deferment, income-based repayment plan), the guidelines previously required FHA mortgage lenders to calculate a borrower’s monthly student loan payment using 1% of the total loan balance. This amount was then factored into their debt-to-income (DTI) ratio, negatively impacting borrowing potential... Now, anyone taking advantage of an income-based repayment plan can have the actual dollar amount they’re paying factored into their DTI, as long as the payment is above zero dollars a month. And, if your student loans are in forbearance, deferred, or your IBR’s monthly payment is zero, then 0.5% of your student debt will be factored into your DTI." Let's unpack this a little bit. Basically what this is saying is that getting a mortgage while under an IBR student loan payment plan got a whoooole lot easier. This, in my opinion, will lead to IBRs increasing EVEN MORE.
I posted this graph on my first DD but I'd like to show it again. It shows how meteoric the rise of these IBR plans has been since 2008. And this was without these new FHA guidelines. Just imagine how much the usage of these IBR plans will increase now that they are no longer a barrier to getting a mortgage. And again, like I said earlier, I believe that increasing IBR plans will eventually lead to increased defaults and discharges of student loans, thus affecting the bottom line of SLABS.
Thanks again for reading. I would say that this will be the last dive into SLABS that I'll do. But that would probably be wrong. Please, keep sending me DMs and comments with criticisms, leads, or anything else. You guys are what make this all possible.
One final thing before I go. I've had a TON of comments asking me how to short these SLABS tranches and how to make money off this whole shitshow. I am not a financial advisor, and I will not be providing financial advice. So please don't ask. But I will say one thing about my own personal investing strategy. I have personally always believed GME to be the best hedge against a market crash, and I will continue to invest in the GME play. Those feelings have not changed since all this SLABS stuff started coming out.
Thanks again guys. Happy reading.
Posted Dec 28, 2021, 4:37 AM UTC · edited