The PJ Tatler

Because it Worked So Well in the Housing Market

Subprime auto loans? General Motors is rolling the dice by vastly increasing the number of loans to less than credit-worthy customers.

Investors Business Daily:

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.