Investors Should be Wary of Student Loan Securities Investments

The Wall Street Journal reported on March 4, 2013 that Sallie Mae sold $1.1 billion of securities backed by private student loans, noting that demand for the offering was fifteen times that. Related to this offering, the Wall Street Journal noted that a new platform was being rolled out by SecondMarket Holdings Inc. that would enable lenders to directly issue student-loan securities to investors.

The potential problem with the securitization of student loans is the increase in default by borrowers on the underlying student loans. The Federal Reserve Bank of New York has stated that 31% of people paying back student loans were late on their payments by 90 days or more, an increase from 24% in 2008, as reported by the Wall Street Journal article.

Investors who are offered or are considering investing in student loan backed securities should keep in mind the spike in pre-recession investing in mortgage-backed securities that was then followed by massive defaults on payments of those underlying mortgages, which in some ways deepened the scale and effect of the 2008 recession. While student loan backed securities may lead to greater yields, these investments would most likely also include increased risk of loss. Investors should remain wary of including this investment in their portfolio, especially given the tough employment market and increase in late payments.

Often times, investments are marketed and sold without complete disclosure about the risks attributable to those investments, or are simply recommended to the wrong sort of investor. The stripping of or failing to provide complete risk disclosures may be deemed securities fraud, and depending on the investor, such a recommendation may be deemed an unsuitable investment. Financial Industry Regulatory Authority (FINRA) Rules require that under certain circumstances, recommendations must also be suitable when made to institutional customers.

The attorneys at Malecki Law specialize in securities litigation and arbitration in forums such as FINRA. If you believe you have lost money as a result of inappropriately marketed or unsuitable investments, please contact an attorney at Malecki Law to determine if you may be able to recover some of your losses.