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 Wants More Subprime Buyers"

"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