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Navient's private education refi loan securitizations begin in Earnest

Navient Corp.'s plans to securitize private education refinance loans are off to a good start, three months after the company closed on its acquisition of Earnest Operations LLC.

"We did our first refi securitization [Feb. 13] and achieved the best execution of a refi ABS deal in the marketplace to date," reported President and CEO John Remondi during an appearance at an investor conference in reference to the $507.5 million Navient Private Education Refi Loan Trust 2018-A.

Navient ended 2017 with total private education refinance loans of $1.3 billion, up from $225 million a year earlier. The company has purchased private education refinance loan portfolios from third parties in the past, and it began originating that product as a result of the Earnest deal. That lender, which generally focuses on borrowers that have completed their undergraduate and graduate degrees, generated private education refinance loan originations of $380 million during the fourth quarter of 2017 and $900 million for the full year.

Remondi reiterated Navient's 2018 goal for private education refinance loan originations of "at least" $1.5 billion, saying that he is "very excited" about the opportunities the product provides the perspectives of growth and returns on equity. Regarding the latter, Remondi said he expects the private education refinance loan product to generate ROEs in the "mid-to-high teens."

Navient had originally planned to pursue opportunities in the private education refinance loan or consolidation loans businesses through organic means. But, Remondi recalled, "When we ... had the opportunity to meet with the team at Earnest, we saw that what they had actually built was very attractive both in terms of their underwriting model, their data analytics and algorithms that they had brought to bear [and], as importantly, how they approach the market from a digital marketing perspective."

The company could have built those capabilities itself, he added, but buying Earnest offered the opportunity to "bring more to the table faster and produce more volume."

Navient completed a $662.2 million securitization of private education loans in October 2017 that included private education refinance loans acquired from College Ave Student Loans. The private education refinance loans accounted for 52.3% of the $752.9 million Navient Private Education Loan Trust 2017-A pool, with production and/or acquisitions from certain entities that were part of the legacy SLM Corp. prior to the 2014 split of Navient and Sallie Mae.

Founded in 2013, Earnest had emerged as a regular issuer of private education refinance loan-backed notes as an independent company. It completed five rated term securitizations of loans with aggregate principal balance of $922.7 million between February 2016 and May 2017, according to data compiled by DBRS.

With an aggregate principal balance of $529.4 million, according to an S&P Global Ratings presale report, the Navient Private Education Refi Loan Trust 2018-A pool is more than twice the size of the largest Earnest Student Loan Program pool.

Though much larger, the Navient pool is similar to the single 2017 Earnest pool in other ways. The average outstanding principal balance of the Navient pool is $74,350, less than $3,000 higher than in Earnest's 2017-A pool. The weighted average gross annual income for borrowers in the Navient pool of $137,946 is slightly higher than that of the Earnest pool. The weighted-average borrower FICO score and age in the Navient deal of 765 and 31, respectively, compare to 775 and 32 in the Earnest pool.

Navient executives have previously stated that the refinance loans do not require the same amount of seasoning as new originations for in-school borrowers; to that end, DBRS reported that there is a 3-month gap between the weighted average original and remaining terms of the loans in the 2018-A pool. The executives said that they expect to more actively securitize Navient's portfolio of refinance loans.

DBRS, in its recently published U.S. student loan ABS outlook, predicted that the issuance volume of transactions backed by refinance loans would increase by 20% in 2018 from $5.2 billion in 2017. The rating agency said Social Finance Inc. ranked as the largest issuer in the refinance loan asset class in each of the last four years, including volume of $3.68 billion in 2017, with Darien Rowayton Bank (doing business as Laurel Road), CommonBond Inc. and Earnest also contributing to the industry's tally.

With the combination of the Navient transaction, which is expected to close Feb. 22, and January's $960.2 million SoFi Professional Loan Program 2018-A, 2018 is off to a quick start.