NCHELP Spring Conference

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NCHELP Spring Conference
Matt Snowling, CFA . 703.469.1196 .
msnowling_at_fbr.com
FBR Capital Markets Co.

• Outlook for the Student Loan Market
• June 9, 2009

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About FBR Capital Markets

• FBR Capital Markets Corporation (NASDAQ FBCM)
  provides investment banking, merger and
  acquisition advisory, institutional brokerage and
  research services through its subsidiary FBR
  Capital Markets Co. FBR Capital Markets
  focuses capital and financial expertise on seven
  industry sectors consumer diversified
  industrials energy natural resources
  financial institutions insurance real estate
  and technology, media telecom. Asset
  management and private wealth services are
  provided by FBR Investment Management, Inc., and
  mutual funds are provided by FBR Fund Advisers,
  Inc. both companies are subsidiaries of FBR
  Capital Markets Corporation. FBR Capital Markets
  is headquartered in the Washington, D.C.
  metropolitan area with offices throughout the
  United States and in London.
• Forward-Looking Statements
• This press release contains forward-looking
  statements. All statements contained in this
  press release, which are not historical fact, may
  be considered forward-looking statements as that
  term is defined in the Private Securities
  Litigation Reform Act of 1995. Actual results
  could differ materially from these
  forward-looking statements as a result of the
  risk factors described in the Company's filings
  with the Securities and Exchange Commission, on
  forms 10-K and 10-Q. In light of these risks and
  uncertainties, there can be no assurance that the
  forward-looking information contained in this
  press release will in fact transpire. These
  forward-looking statements represent the
  Company's judgment only as of the date of this
  press release. The Company does not have any
  intention or obligation to update these
  forward-looking statements.

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How Did We Get Here?De-leveraging of Financial
Markets

• Initial credit concerns in subprime mortgages
  evolved into full-blown credit and liquidity
  crises.
• Auction-rate securities (ARS) markets begin
  failing (February 2008)
• Bear Sterns (March 2008)
• Fannie Mae, Freddie Mac, AIG, Lehman (September
  2008)
• Money market fund breaks the buck
• De-leveraging of global financial markets
• Selling pressure on all asset classes as funds
  unwind leveraged positions
• Lack of liquidity worse for longer-duration bonds
  regardless of collateral
• Traditional buyers of student loan paper such as
  SIVs and CDOs exiting market
• Investors demanding higher unlevered returns
• Results in higher financing costs for student
  lenders

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Remaining Investor IssuesUncertainty Holding
Back Investor Demand

• Market confusion regarding multiple government
  liquidity programs
• Lack of clarity on what role the private sector
  will play in a 100 Direct Lending world
• Servicing risk
• Uncertainty whether servicers will be around in
  five years
• Excess spread risk
• Widening CP/LIBOR spreads are reducing excess
  spread protection
• Higher returns on other AAA rated asset-backed
  securities
• Competition for investor dollars from credit
  card, auto, mortgage-backed securities

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CP/LIBOR Spread Dislocation Government
Intervention in CP Markets Compressing Lender
Yields
Source FactSet and FBR Research
6
Cost of ABS Funding for FFELP LoansFunding via
Securitization Market Has Become Prohibitively
High
Source Sallie Mae trust data and FBR Research
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Cost of ABS Funding for FFELP LoansGovernment
ABCP Facility Returned Funding to Historical
Spreads
Straight-A Funding
Source Sallie Mae trust data and FBR Research
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Credit Quality Also a Concern for Private Loans
Later Vintages Showing Accelerating Credit
Deterioration
Source Sallie Mae and First Marblehead trust
data and FBR Research
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Private Student Loan FundingCredit and
Structural Issues Make It Difficult to Finance

• Before 2008 Term funding (approximately 7.5
  years) for private student loans was available
  around 3-month LIBOR 0.25.
• 2008 Securitization market completely closed for
  private loan asset-backed deals.
• 2009 Liquidity is returning, but funding costs
  are significantly higher.
• January Sallie Mae/Goldman Sachs issued a 1.5
  billion 10.5-year private student loan facility _at_
  3-month LIBOR 5.75
• May Sallie Mae issued 2.6 billion TALF-eligible
  private student loan ABS _at_ 1-month LIBOR 6.00
  (LIBOR 3.66 priced to call)
• Original TALF financing available for only three
  years, creating a duration mismatch
• TALF II to provide financing for five years
  should create more investor demand
• Lenders raising rates to offset higher cost of
  funds, but investors only funding senior part of
  capital structure (AAA), leaving lenders to
  finance 4050 of loans on their own.
• On-balance-sheet/deposit funding is the most
  viable source of financing until the
  securitization market recovers.
• Requires significant capital commitments
• Limited cash flows in early years of the loan

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Proposals to Fix FFELNo Clear Support Yet for
Alternative to 100 Direct Lending

• Presidents Budget
• 100 Direct Lending
• Private sector servicing, originations?
• 20 billion of savings over five years per
  education budget
• 94 billion of savings over 10 years per CBO
  estimate
• Private sector services loans
• Extending ECASLA
• Loan Participation/Purchase Program
• Funding via government supported Asset-Backed
  Commercial Paper Conduit (Straight-A)
• Generated 11 billion of savings to the
  government
• Sallie Mae Proposal
• Hybrid of Presidents plan and Loan Purchase
  Program
• Private sector originates and services loans,
  default prevention
• Lenders sell loans to Department of Education
  within 120 days for a fee (initially 75 per
  loan)
• Servicing is retained for eligible lenders
• Estimated to produce 90 of savings proposed
  under the Administrations plan

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Long-Term OutlookProjections for the Student
Loan Industry

• FFEL program as we know it is gone
• Term funding is not available at economically
  viable spreads
• Direct or indirect government support is required
  to access funding
• Do not expect a fix in the CP/LIBOR spread
• Likely to cost the government approximately
  700 million to 1 billion
• Spreads are beginning to improve
• Expect the majority of the loans originated under
  the Participation-Purchase Program to be sold
  back to the government
• The government will become dependent on the new
  revenue sources created by the loans, which will
  be hard to give up.
• Projected 94 billion of savings under the
  Administrations plan will not be realized
• Savings dependent on Treasury rates remaining low
• 10-year Treasury rates up 1.00 from February
  levels
• Cumulative defaults likely to exceed 11.9
  projected for FFEL and 10.8 projected for DL
• Without risk-sharing, the government will assume
  the burden of higher defaults
• Will create a funding shortfall in future budgets
  that the government will need to fill

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Long-Term OutlookContinued

• Converting more than 4,000 schools to the Direct
  Loan Program by July 2010 will be logistically
  risky.
• Numerous stakeholders are involved from schools,
  students, lenders, service providers, and
  government.
• Delay in implementation would cost approximately
  10 billion in the first year.
• Opportunity is to modify Administrations
  proposal
• Need to achieve similar savings
• Requires government ultimately owning the loan
• Reduce operational risk, maintain school choice
• Requires utilizing existing FFEL infrastructure
  to provide origination, servicing, default
  prevention, and borrower education services

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San Francisco, CA 94111415.248.2900 London,
UKFBR International, Ltd.8th Floor, Berkeley
Square HouseBerkeley SquareLondon WIJ
6DB011.44.20.7409.5300
FBR Capital Markets CorporationMetropolitan
Washington, D.C. Headquarters1001 Nineteenth
Street North . Arlington, VA 22209703.312.9500 T
. 703.312.9501 F . www.fbrcapitalmarkets.com
NOTE Not all services are available from all
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