Interesting twist on the First Marblehead consideration

A recent post at Seeking Alpha points out a FMD consideration we completely forgot about. [And we might also point out, wasn't in the sights of FBR either.]

FMD bought a bank in Rhode Island last year; albeit, a modest community bank: Union Federal Savings Bank. It seems that FMD has quickly adapted the bank to become a cost effective liquidity source for First Marblehead's student loan business. Thus, engineering a non-ABS funding ability.

Seeking Alpha has drudged through Union Federal's balance sheet and garnered some insight into the how the new owners are leveraging this institution. Essentially, brokered deposits are financing First Marblehead's direct to consumer business. For the time being, it seems that the bank is on a sound capital base and indeed making money.

Our worry is the same as FMD in general: how will these loans hold up in uncertain economic times? How will these loans hold up during a period when the private student loan market dynamics changed in a very short period of time? It will become a matter of credit underwriting and credit operations. We personally do not think that underwriting and credit ops is a strong point for FMD, but time will tell. Watch FMD's portfolio reporting and losses at Union Federal for indications of how things will likely shake out.

To be sure, the banking regulators will probably be watching the situation with a close eye as well. Using a banking charter to serve First Marblehead in this manner probably isn't making many friends with the bank examiners.

Check it out for yourself, but certainly an interesting angle that no one else in the business is working.