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Sunday, May 16, 2010

GM Wants More Subprime Buyers

Last week I linked to a story about how GM wanted to get back into the  financing business.

Today's AP headline had me tilting my head and raising my eyebrows in surprise:


"GM's top North American executive Mark Reuss, under pressure to quickly sell more cars and boost GM's value as it gets ready to sell stock to the public, said a shortage of subprime lending is holding back sales in the U.S.

But the automaker's main lender, Ally Financial Inc., has little appetite for risky loans, having spent the last few years cleaning up its own financial mess caused mainly by its failing mortgage lending business. Both companies are majority-owned by the U.S. government.

For decades, GM owned Ally, writing its own loans through the so-called captive finance arm. Nearly every automaker makes loans in such a fashion. But a cash-starved GM sold most of Ally -- formerly known as GMAC -- in 2006.

GM and Ally now have a loose partnership that gives Ally control over who gets a car loan. If GM returned to auto lending -- either through buying Ally's auto business or starting its own in-house lending unit -- it could set lending standards itself. That could benefit the automaker by allowing it to extend loans to people with weaker credit and to more lease customers."

Amazing, right?  GM's business plan to sell more cars is to give loans to less creditworthy customers.  Wow.
The article notes:

"For example, Honda Motor Co. gets 20 percent of its sales and leases from subprime buyers, he said. GM, on the other hand, gets only 1 percent because it can't access the money to loan to those customers."

and then:
"Ally has been less than eager to resume lending to risky customers."

That damn Ally and their prudent lending practices!!! (/SARCASM!)
Now, to be fair, subprime auto loans are not quite as devastating as subprime home loans:

"Subprime lending for cars is generally considered less risky than mortgages. During the recession, borrowers didn't default on car loans as much as they did on homes because the value of cars never became overinflated. Also, if a car buyer defaults, the lender can quickly repossess the vehicle and resell it, recouping at least part of the lender's investment."

I'm not sure that the reason buyers didn't default is because "the value of cars never became overinflated" - if buyers can't pay, it doesn't matter what the value is.  The reason buyers didn't default probably has much more to do with the fact that the car payments are much lower than the house payments!
"Ally would appear to have little to gain, though, from selling its auto lending operation, by far its most profitable line of business. Writing auto loans made Ally $846 million in pretax profit in the first quarter -- the division's fifth straight quarterly profit -- up 28 percent from a year earlier."

So, if subprime auto loans are so profitable, why isn't Ally making more of them? From earlier in the article:

"After GM sold a majority stake in Ally, the lender became heavily involved in the subprime mortgage boom, a move that nearly bankrupted the company when the housing market collapsed. Ultimately, the federal government has spent $16.3 billion to bail out the lender, leaving taxpayers with a 56 percent stake in the former GMAC.

Ally has spent the last year trying to clean up its mess, diversifying its customer base beyond just GM buyers, launching a highly profitable online banking service and working to sell what remains of its mortgage lending business. Earlier in May, the company posted its first quarterly profit in more than a year and rebranded itself as Ally."

If Ally, having now found "religion" doesn't like the risk-reward of subprime auto loans, it implies to me that either subprime auto isn't the bonanza that GM thinks it is, or that Ally still has balance sheet issues and is sticking only to solid, low risk loans for now, until they can completely clean up their mortgage lending biz. 

-KD

11 comments:

getyourselfconnected said...

Ronnie James DIO died today. Over time all your heroes will fall. 67 is a good run, but he was a metal god.

Onlooker said...

Just one more piece of evidence that we're trying desperately to creep back to the credit bubble again. It was just too much fun to resist going back there, eh?

And of course there's the huge moral hazard that our fearless leaders have stoked to ever higher levels. Wonderful.

transactioncosts said...

The reason subprime mortgages are doo-doo is that they're used to make bets on the future appreciation of the underlying asset (real estate). It's a way for people to bet with money they can't otherwise borrow. When they lose the bet, we all lose.

Cars will never appreciate, and everybody knows this. So a subprime car loan doesn't carry the same danger, because the borrower isn't going to use it as a cheap way to bet on the auto industry.

Kid Dynamite said...

right transacioncosts, sure - i'll nod to most of that (although subprime mortgages certainly weren't designed as a way for people to bet on housing appreciation, even though they rapidly evolved into that). and YET - subprime loans - auto or home - are still to lower quality borrowers, who are a higher credit risk - no matter how you cut it...

But What do I Know? said...

Seems like the classic sales/accounting conflict to me--sales doesn't give a damn if the customer can pay, they just want to make the sales; accounting doesn't give a damn if there are any sales, they just hate writing off accounts receivables. . .

tom said...

"I'm not sure that the reason buyers didn't default is because "the value of cars never became overinflated" - if buyers can't pay, it doesn't matter what the value is. The reason buyers didn't default probably has much more to do with the fact that the car payments are much lower than the house payments!"

I'm sure this is part of it, but houses are harder to reposes. If you get foreclosed on you may end up living in the house for a year + fighting (or just ignoring) the process. With a car once they find it they take it. This means you get much less benefit from the period that you aren't making payments and it also means that stopping payments on your car can mean a very sudden inconvenience. One day you wake up and you can't get to work or take your kids to school. With a house you have months in advance warning (as well as cash being offered for your keys to help you get out).

Ken said...

The solution is simply.

The government already owns the majority of Ally Financial.

A quick name change to AllyMae and they can assume the role of Fannie/Freddie as it relates to auto loans.

It certainly would ensure the government can take GM public much sooner and at a much higher price than anyone dreamed.

The funniest part of the article was the reference to Honda having such a huge market share of the subprime market.

Gee, you think that might be driven by the fact Honda's do not depreciate nearly as quickly and hold their resale values much better than the typical piece of junk offered by GM.

It is shocking to discover the underlying quality of the assets actually matters in the world of financing.

Anonymous said...

Kid, I'm not sure why GM's the bad guy here.

If GM turns away a buyer, that's one more (very expensive) nail in their coffin. The customer goes down the street to the Kia/whatever dealer will give them financing. Someone on the sales floor is required/inspired to be hungry-enough to finance the sale.

When keeping a roof over your head and food in the belly depends on straight-sales it takes away your imperious distaste for poor credit.

Anonymous said...

Ken,

There was a time when GM product was obviously worse than Honda/Toyota product.

But the game has changed on both sides. Honda quality is not where it was and GM's is greatly improved.

I'd argue that sets up a good value opportunity.

JCH said...

Hey KD, whats you gotta against Z-28s and F-Byrds and the peoples dat like 'em? US rednecks is ben bettin' our food stamps on dem GM cultural icons appreciatin' for decades. My B-yard is full of 'em. F-yard, too. Just cuz Wal-Mart got me on cash in advance don't mean nothun' like me BN no stinkin' credit risk.

getyourselfconnected said...

The US lost 1.6 Billion on the Chrysler deal, wow. That used to be big but now not so much.

Just like homes, unless credit can be real loose sales will fall. No one but the government wants to make home/auto loans to crappy borrowers right now.