GM Ramps Up Risky Subprime Auto Loans To Drive Sales
By DAVID HOGBERG, INVESTOR'S 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.
Subprime lending in cars is not as risky as in housing. Car loans are cheaper, so customers have an easier time making payments. When they do go into default, the cars can be repossessed and sold to recover some of the loss.
"The subprime market grew as a result of the recession," said GM spokesman Jim Cain. "Our experience, however, is that with proper management they are very good risks."
He points to GM's credit losses which have not risen above 5.5% since late 2010.
Nevertheless, since it acquired GM Financial, GM has seen its subprime loans grow from about 4.8% of sales in Q4 2010 to 8.2% in Q1 2012. The industry average is about 6%.
"Is GM taking on more risk than is safe given our uncertain economy?" asks Edward Niedermeyer, TheTruthAboutCars.com editor-at-large. "They may be trying to goose short-term sales with subprime lending to boost its stock price, which is tied to the government getting out of its GM investment."
GM still owes about $26.4 billion in direct aid to the federal government. The Treasury owns 26.5% of the automaker, or 500 million shares. The stock price would need to be 53 to recoup those taxpayer costs.
GM shares closed Friday at 19.67 after hitting a post-IPO low on Wednesday.
Subprime 'Double Standard'
When pushing the Dodd-Frank financial overhaul, Obama told Americans, "you have a stake in it if you've ever tried to take out a home loan, a car loan, or a student loan, and been targeted by the predatory practices of unscrupulous lenders."
While the administration has targeted subprime mortgage lending, it seems to have turned a blind eye to auto subprime loans.
"The Obama administration has seen to it that the Consumer Financial Protection Bureau is important in the subprime mortgage arena," said Niedermeyer. "But it has exempted auto-finance from that. I definitely think it is a double standard."
He also wonders if the Treasury will be able to recoup its GM aid: "The conventional wisdom has been that consumers have too much debt and need to de-leverage. Having that weak underlying foundation makes this rise into subprime lending by GM more worrisome."
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