Subprime auto loans? General Motors is rolling the dice by vastly increasing the number of loans to less than credit-worthy customers.
President Obama has touted General Motors (GM) as a successful example of his administration’s policies. Yet GM’s recovery is built, at least in part, on the increasing use of subprime loans.
The Obama administration in 2009 bailed out GM to the tune of $50 billion as it went into a managed bankruptcy.
Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM’s growth.
The automaker is relying increasingly on subprime loans, 10-Q financial reports shows.
Potential borrowers of car loans are rated on FICO scores that range from 300 to 850. Anything under 660 is generally deemed subprime.
Subprime Key Driver
GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.
The worse the FICO score, the bigger the increase. From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores — below 540 — shot up 79% to more than $2.3 billion. The second worst category, 540-599, rose 28% from about $3.4 billion to $4.3 billion.
Prime loans, those above 660, dropped 42% to $676 million.
GM Financial provides just over 8% of GM’s financing. Prior to 2006, GM’s captive lending arm was GMAC, but GM sold a controlling stake in 2006. GMAC later renamed itself Ally Financial and continues to provide the bulk of GM’s financing.
At the peak of the credit crisis and recession in late 2008, Ally announced that it would move away from subprime lending.
By spring 2010 GM’s new management, led by North American executive Mark Reuss, wanted to move back into subprime, fearing that GM couldn’t compete.
Yes, GM has to sell product to survive and prosper but I would like to point out that we, the taxpayer, still own a considerable slice of the auto giant — 26% to be exact. If there is another downturn, a lot of those loans are going under with a subsequent hit to GM’s bottom line, as well as its stock price. Selling that stake right now would cost taxpayers $14-16 billion. GM’s IPO was $33 when it went public again in 2010. It closed at 19 on Friday. A bad couple of quarters caused by delinquent loans would only exacerbate the problem Uncle Sam has in trying to dump GM stock without losing too much of our original $25 billion investment.
Mitt Romney thinks we should sell the shares and be done with it. But some analysts believe that the true value of GM stock is near $45. There is little confidence, however, that General Motors can turn itself around and regain some of its dominant market share lost in the last decade.
And they probably won’t do that by racing to the bottom of the barrel to find customers.
We’ll lose money on every defaulted loan, but we’ll make it up in volume.
If that were your personal money, would you make that loan? No? Then why would you do it commercially?
It is this willingness to make bad loans, to have low credit standards, which incentivizes people to be deadbeats.
When I was 20, it was almost impossible for someone my age to get a credit card. AmEx had very high standards, for example. You had to get small loans from retail creditors, or get a prepaid credit card. Bad credit was a big deal. If you had it, there was no getting away from it. It stayed with you. Heck, employers used to check credit ratings, and if yours was bad, they would not hire you. It was all a BFD. But now? Doesn’t seem to matter, anymore, does it?
It’s the only way the fascist puppet CEO can prop up the company to get the fascist controller through the election.
The bad loans won’t bankrupt them again until late next year, well after the election.
This will be good for the repo man.
Exactly! And it’ll be good for the used car market. Well, kind of, but in a good way. It will bring a lot of used cars to market, lowering the price of the current crop of beaters that we currently can’t afford. But after this, we’ll be able to afford to buy a junker to go to our part time Jack in the Box jobs. We won’t have to ride the bus. We’ll be free! Then we can stick it to the man! Until they come and repo the junker. And then, we’ll have to take the bus. Until we’re fired because the bus was late. But, wait a minute! We’ll be able to go on unemployment. We’ll get a raise! We’ll get another junker. But we won’t have to go anywhere! ‘Cause we don’t have no job!
Nothing new here. No interest loans and rebates in the auto industry for many years now. Creditworthiness hasn’t been a factor for many years now and, worse, credit scores mean nearly nothing in reality – it’s all a crapshoot.
Many folks with otherwise (once) decent scores saw them fall precipitously when banks began cutting limits.
The faster the whole house of cards crashes the better, IMO. Load ‘em up!