The Coronado Student Loan Trust was the single largest loan commitment trust to fail. It had an unacceptably high concentration of subprime loans, and its continued existence was threatened by the risk of this overexposure to subprime borrowers. To understand what went wrong with this trust, it’s best to first understand what a student loan trust is and how they work. A trust is essentially an entity that owns assets, such as loans or mortgages. In other words, a trust is not a third-party company, but simply a legal arrangement for holding assets and property. The Coronado Student Loan Trust was established in 2005 as a way for investors to gain exposure to student loans without owning them directly. Think of it as an investment club that owns shares in specific companies rather than owning the companies themselves. Each share represents an undivided interest in the trust’s assets. Coronado Student Loan Trust ended up being overexposed to subprime borrowers, which led to its failure as those loans defaulted at a high-interest rate.
What is a Collateralized Loan Obligation Trust?
A collateralized loan obligation trust, or CLO, is a type of investment vehicle that is structured like a trust. The trust is an arrangement to hold the assets that make up the fund – typically loans. A CLO is a large pool of loans that are put together, often by a bank or investment bank, and then sold to investors. In this case, the loans are all student loans. The loans can either originate from CLo or be purchased from other lenders. CLOs are often used as collateralized securities, meaning they are backed by some form of collateral. Student loans are often used as collateral because they are generally considered safe debt.
How does a student loan fund work?
A student loan fund is a form of the collateralized loan obligation. The trust is an arrangement to hold the assets that make up the fund – often student loans. A student loan fund is a large pool of loans that are put together, often by a bank or investment bank, and then sold to investors. In this case, the loans are all student loans. The loans can either originate from the CLO or be purchased from other lenders. The trust holds the loans until the maturity date, after which the investors get their money back plus interest. Most student loan funds operate as pass-through funds, meaning that investors do not receive payments from the loans. Rather, the investors receive the proceeds from the sale of the loans when they are repaid by students. This is because the loans are secured. Student loan funds work best when the interest rates on the loans are low. This is because low-interest rates mean the loans are paid off quickly, making it possible to wind up the trust. When interest rates are high, it takes longer for the loans to be repaid, making the liquidity of the trust less secure.
Risk of default for student loan borrowers
The default risk associated with student loans is a significant consideration when assessing the risk of student loan funds. After all, an investor’s ability to make money on a student loan fund comes primarily from the repayment of the loans. The repayment of student loans is dependent on the borrower repaying his loan. If the borrower is unable to pay, the investor will not be repaid. The probability of student loan default is based on the borrower’s creditworthiness. The three main creditworthiness metrics commonly used to assess default risk are credit score, loan-to-value (LTV), and debt-to-income (DTI). The higher the credit score, the lower the probability of default. This is the case for both mortgages and student loans. The lower the LTV, the lower the probability of default. This is the case for mortgages, but not for student loans. The lower the DTI, the lower the probability of default. This applies to both mortgages and student loans.
Why Did Coronado Student Loan Trust Fail?
The high concentration of subprime borrowers in the Coronado Student Loan Trust was a red flag. This meant that a large number of the loans in the trust were made to borrowers with low credit scores. This is concerning because student loan borrowers with low credit scores are more likely to default on their loans. Borrowers with low credit scores are not only less likely to repay their loans, but they are also less likely to complete the education that might otherwise have given them better job prospects and higher incomes. The risk of default and poor repayment is a factor when calculating the expected return from student loan funds and other CLOs. When investors examine the expected return and the risk of not being repaid, they decide whether the investment is worthwhile. The expected return is based on the current market for student loans and thus the risk of the investment. The Coronado Student Loan Trust was the single largest loan commitment trust to fail. It had an unacceptably high concentration of subprime loans, and its continued existence was threatened by the risk of this overexposure to subprime borrowers.
Could other funds be at risk?
Yes. The collapse of the Coronado Student Loan Trust and the failure of other student loan trusts is a sign that student loan trusts are riskier than many investors had believed when they bought these investments. The risk of student loan funds is clear, but it is not yet clear how this risk will affect the broader student loan market as well as the market for other types of CLOs.
Final thoughts
The collapse of the Coronado Student Loan Trust and the subsequent ripple effect is a reminder of how complex and interconnected the financial markets really are. When the CLO market collapsed, it hit the market for CLOs hard and caused a ripple effect that hit the broader financial markets. The student loan securitization market is particularly ripe for disruption. It is a relatively new market that relies heavily on securitization to expand its reach and offer funds to an increasing number of students. With the collapse of the CLO market, investors have fewer places to put their money. This has caused many investors to become more cautious, which in turn has shrunk the market for student loan securitizations. It’s also important to keep in mind that the collapse of the Coronado Student Loan Trust does not mean that all student loan trusts are bad investments. This means that investors need to be more careful when choosing where to put their money.