First Marblehead (FMD) is a name that has been taken out with all the other stocks in any way associated with liquidity, debt, housing, or mortgages. But I think the selling in this name begets a good opportunity for traders as there are likely many misconceptions revolving around this company.

Contrary to popular opinion, FMD is not in the business of loaning money to students for educational loans. The company does not have that debt on their balance sheet and is not left holding the bag if a weakening consumer decides that he can no longer pay his student loans. So lets take a closer look and see what FMD actually IS in the business of doing…

The primary clients of FMD are financial institutions (regional and national) as well as educational institutions who want to design a loan program for students. FMD often enters the process by consulting with the institution as to how to comply with regulations, develop and market this program, and helps plan the long-term picture as to how these loans will be serviced, securitized, etc. Often this initial consultation is done free of charge with an agreement that FMD would have the exclusive rights to service the loans and to securitize the loans the firm does not wish to keep. FMD is then paid an advisory fee when it bundles and sells a pool of loans to the end investors.

So while the company is affected by liquidity constraints in the market right now, it is not at risk in the sense that it has to hold loans on its books that could decrease in value or pose a liability to the assets of the company. Education lending still continues to be a growing business and FMD has been able to continue to design programs and securitize loans for the financial institutions. Some of the concerns analysts have uncovered revolve around the prepayment rate the firm assumes for the pools it services. If borrowers prepay their loans, it cuts down on the revenue FMD will receive from financial institutions for servicing. Prepayment trends have been rising, but there is some recent evidence that points to a moderation.

Another concern is that SLM who is a competitor of FMD has agreed to be bought out by a consortium of banks, some of whom are FMD’s customers. Management has stated that they continue to anticipate having a strong relationship with these banks, and have also diversified their client base to keep any particular institution from having a large effect on FMD’s success.

The company announces earnings on the 9th which will obviously add some volatility. I believe that the bad news has been baked into the price at this level and expect some relief as investors see the overall economic trends having a muted effect on the company. As such, I have been working into a small position and will likely add to that assuming it trades well over the next few days.

FMD Notes

Dan Fitzpatrick from the Street.com isn’t as excited about FMD as I am

Zachary Maxfield (must be a good guy judging by the name) thinks the Thomas Weisel has some miscalculations.