By on November 21, 2008

Loans and leases are getting hard to come by for anyone interested in a car or truck from GM, Chrysler or Ford. Banks now routinely put out lists with “red lines” through makes and models they no longer want to finance. Those products are increasingly domestic in origin.  Redlined vehicles are harder to sell, forcing down values, rendering loans even more unattractive, making those cars and trucks even harder to sell, forcing down… you can see where this is going. Major lenders in the US are not waiting for The Big 2.8 to file for bankruptcy. They’re treating them like it’s a done deal.

To be fair, the money supply has tightened for everyone– whether you’re buying a Maytag or a Mitsubishi. Credit scores of 750 used to mean no problem, your car will be ready in a hour. That’s no longer the case. Banks have become mice at a falconry tournament, and it’s not hard to see why. They never really knew what their mortgage tranches were worth, and that bit them good. They thought they knew what SUVs were worth. Ouch again. Twice bitten is what? Four times shy?

SUVs and trucks first caused banks to uncap their red pens way back in the beginning of 2008, as gas prices began deflating values. By July, independent lenders like NBT Bank shut off leases for a litany of vehicles, citing gas prices as the raison du rouge. Their list included the still decent selling Porsche Cayenne and went on: No Ford trucks or SUVS, Chevrolet SUVs or Toyota SUVs. Then they started to broaden their negative horizons. No Chryslers, Jeeps, Hummers, GMCs, or Cadillacs. A little lending war had begun with Detroit. While this seemed extreme at the time, other money men followed suit, though not always with the same card.

Bank of America, for instance, does not say no. It’s more like not so much. They cut back on the amount of money they will front for certain vehicles. For example, last year you could finance 120 percent of the cost of your Suburban. This year, 110 percent. While this doesn’t seem too draconian, it’s yet another way of making some products harder to buy than others. Again, those hard-to-buy cars and trucks are turning out to be domestics.

Other lenders, like U.S. Bank, take yet a different approach. On November 1, they hiked their rates on Chrysler, Dodge and Jeep products, across the board. Unsure of what those products might be worth six months, let alone 48 months, from now, they’ve gotten skittish. They now rate Chrysler iron high-risk and price their loans accordingly.

The net result of turmoil in Detroit, then, is more turmoil. Timorous lending has been across the board, but that affects domestic more than foreign marques. Reason one: as has been reported here frequently, a lot of the car-oriented money men (e.g. GMAC) had notoriously louche lending standards.  If a dealer had someone with shaky credit, that customer was pointed towards more Cobalts than Civics.

That’s over. The playing field has been leveled.  Whether or not a lender is playing favorites, there is no more easy money. An advantage that was Detroit’s is lost.

Reason two: money for trucks and SUVs constricted first and most severely. GM, Chrysler and Ford were (and are, relatively speaking) more dependent on these products than their competitors, both in terms of market share and return on investment. So Toyota loses, but The Big 2.8 lose bigger.

Reason three: new vehicle buyers– and there are still millions of them– are choosing a foreign car over a domestic because the transplants are “saved by zero.” Now is the time nul points financing can really move the metal. And now is the time the domestics can’t offer it. Here, Detroit doesn’t just lose, one of the competitors gains. They get to watch market share shift.

The biggest hit to Detroit is in the area of confidence. Banks are competitive. They don’t all get together every couple of months and decide to simultaneously screw a couple of major US corporations. They are each arriving at the same conclusion separately. GM, Ford and Chrysler products are difficult to value.  The only safe thing to do: cover the bet. Even better, stay away completely.

You can hardly blame the average consumer for taking the same stance. Mainstream cars and trucks are mostly fungible. If you can’t get bought on a Malibu, step this way. Hows about a Camry/Ultima/6/Accord/Galant/Sonata/I’m probably-forgetting-a-few? For most people, the differences just aren’t that noticeable when compared to whether or not the company’s around this time next year. As a selling point, that probably ranks up there with the AUX jack, number of cup holders and ideas about patriotism.

So, if Wagoner, Nardelli and Mullally are worried about perception, they can now relax. The stench of bankruptcy has already set in, and set in good.

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32 Comments on “Editorial: Redlining the Domestics...”


  • avatar
    SunnyvaleCA

    Hows about a Camry/Ultima/6/Accord/Galant/Sonata/I’m probably-forgetting-a-few?

    Yeah, the Nissan Altima. :-)

  • avatar
    no_slushbox

    Now is the worst possible time to buy a domestic car. It will be much better to buy a domestic car post Bankruptcy.

    Right now it is uncertain what brands will survive, and what brands will die. Depreciation will not be friendly to models from the dead brands.

    After Chapter 11 it will be known what brands are surviving and which are dying.

    Right now if you buy a big-3 car, and they go Chapter 11 (like they need to), your warranty will have unsecured creditor status.

    After Chapter 11 the post-Bankruptcy warranties will be underwritten by the government (of course charging an FDIC like insurance premium to do so) to maintain buyer confidence, so the warranties of those who buy after Bankruptcy will be safe.

    If, tragically, there is a pre-Bankruptcy bailout instead of Chapter 11, then buyers will face the huge uncertainty of waiting for “American Leyland” to implode. There is no certainty in a bailout; the automakers will die as soon as the government can no longer stomach cutting check after check.

    The best way to create certainty and confidence for buyers of big-3 cars is to have a managed Chapter 11, and soon.

    Once I know that Chevrolet will be one of the surviving brands, and that the government has guaranteed the warranty, I look forward to buying a new Camaro from a Chapter 11 GM.

    As a matter of principle I will buy nothing from the sick mix of bad management, parasitic dealers and hugely overstaffed UAW workers that will exist under a bailout.

  • avatar
    seoultrain

    Agreed with that last sentence. I’ve been saying that GM is getting all the negative press of bankruptcy without the benefits of restructuring. They might as well file at this point. If this government loan doesn’t work out, they should file the next day.

  • avatar
    bumpy

    I dunno; if the price was low enough I could see taking a chance on a no-warranty G8 or Astra to be worth a shot.

    Is that the tach for an ITR?

  • avatar

    seoultrain :

    And so they will.

  • avatar
    golf4me

    Spot on, Farago.

  • avatar
    Paul Niedermeyer

    “BA will (still) finance 110% of a Suburban”

    Seriously? WTF? And I thought that’s how we got ourselves into this mess.

  • avatar
    Mark MacInnis

    So, now we find out what a domestic vehicle is “intrinsically” worth.

    Methinks we will see 08 and 09 vehicles on the domestic dealer lots through 2011….and since they are already selling 08′s at 50 cents on the dollar of MSRP, bargains will be available. How low will they go? Will we see Stratus’ (Strati?) at $5k giveaway, or will they crush them first?

  • avatar

    You can get a Dodge Ram, and a second one free.

  • avatar
    hltguy

    One of my employees has a 2004 Yukon, fully loaded, 75K miles, excellent condition.
    She contacted GMAC today to ascertain the “value” of it, possibly to dump it. GMAC said they value the vehicle at $2,000.00! That’s right $2K! (She owes $18,000.00 on it.) A wee bit upside down.

    My brother lives in Hilo Hawaii, the Ford dealership there is selling new (base models) 2008 F-150′s for $9,800.00. I read an article this week some Dodge dealer in Florida is having “buy a Dodge Ram and get one free” sales event..

    One last quick story: The Dodge dealer where I purchased my truck last year called me this week on my birthday. He just wanted to say “Happy Birthday”. I kind of ask him is this a sales call? He said no, his response “no, I am sitting here with nothing else to do, just thought I would call you and wish you a happy birthday.”

    That was it.

  • avatar
    John Horner

    “For example, last year you could finance 120 percent of the cost of your Suburban. This year, 110 percent.”

    Which is still nuts. I haven’t financed a car in a long time, but I remember that when I bought my first brand-new car (and got my first auto loan) it was a 1985 VW Scirrocco and I had to put 30% down to do the deal. Of course that was no problem because I wouldn’t have been in the market for a new car if I hadn’t been able to put up at least 30%.

    The idea is that the collateral value of the vehicle needs to more than cover the loan the day after you drive off the lot, at which point it is a used (depreciated!) car.

    I guess that now I know how people of relatively modest means had been buying very expensive vehicles.

  • avatar
    tony-e30

    Really? A falconry tournament?

  • avatar
    SunnyvaleCA

    I always thought “new car financing” was a bit weird. If you need financing, you should be looking at a used car in the first place. Sadly, “used car financing” is a bit trickier. I financed my first car with a $5000 signature loan from my credit union–much easier than dealing with comprehensive and collision insurance, car finance people, etc.

  • avatar
    no_slushbox

    I don’t have a subscription, but according to the Wall Street Journal GM’s Board is actually realistic enought that they have started considering Chapter 11:

    http://online.wsj.com/article/SB122731593872949815.html?mod=yahoo_hs&ru=yahoo

  • avatar
    DAC17

    Before we get too upset about this, remember the previous poster’s comment about how it used to take 30% down to buy a car. The REAL issue here is not about the car’s value, it’s about the willingness of the buyer to not pay the loan because he or she is “upside down”. Turn in the keys and walk away.

    In my world, it doesn’t really matter what the car is worth; you pay the loan that you agreed to. Unfortunately, that view is not so prevalent today. That’s the problem!

  • avatar
    Point Given

    I work for a private leasing company and we are being very conservative with where we set the residuals. I take black book future residuals after kilometer deductions and then take another 15% off the number. If you want to lease a GM/Ford/Chrysler it’s pretty much the only option.

    You’d think that it would work out better to lease a import (ie. f-150 vs Titan or Tundra)but the fleet lease bucks that the domestics offer makes it work out in their favor. Of course last month we had additional reductions and are presently expecting more of the same any day now.

  • avatar
    Wolven

    This is just absolute BUL$HIT… The bank dictates what vehicle I can and can’t finance?

    There SHOULD be an IMMEDIATE BOYCOTT on ANY bank dictating vehicle choices.

  • avatar
    MikeInCanada

    Re: Wolven –

    Why can’t a bank have a say in which car it will or will not finance? Their obligation is to the people that gave them the money in the first place – not to the people that want to borrow it.

    It just makes sense if a bank does not want to find itself making loans that have asset values far less then the loan – and by the looks of things cars from the Big 2.8 are getting ready for a big hit of depreciation. Imports, not so much….

    Didn’t we just get done giving banks sh*t for giving $500,000 loans on $250,000 homes? This is no different.

  • avatar
    Wolven

    Didn’t we just get done giving banks sh*t for giving $500,000 loans on $250,000 homes? This is no different.

    First; There was no mention of the “asset” being worth less than the loan. In fact, that’s a given on ANY new car loan.

    Second; The issue for the bank SHOULD be, can the borrower repay the loan. And THAT is the issue regarding the home loan mess. NOT what the value of the house was.

    Third; This is just a blatant attempt to enforce the enviro whack jobs jihad against American automobiles, particularly the SUV.

    It’s Bul$hit and the banks engaging in it should be slapped with a lawsuit. And the a$$wipes DEFINATELY should NOT be getting any TARP bailout money.

  • avatar
    BuzzDog

    Excellent point, MikeInCanada…after 28 years in the banking business, it’s nice to see someone who finally understands that banks aren’t lending out their own money. It’s the money that your grandmother turned over to us when she opened her certificate of deposit, as well as the money invested in people’s retirement plans.

    Wolven, an ability to repay (capacity) is only one factor in sound lending decisions; having collateral to back up a loan is another, as is credit history. Banks often won’t lend money to buy used vehicles beyond a certain model year (when the vehicle is used as collateral); it’s a safety and soundness decision that banks not only have a right to make, but are encouraged to make by their regulators. And it’s not anti-U.S. The bank I worked for in the 1980′s required a larger down payment (30% versus 20%, which was usual for the time) for Hyundai buyers. We wouldn’t even touch Yugos…

  • avatar
    rmwill

    There is a Hyundai dealer near here selling 2007 models on “closeout” Mostly Tucson and Santa Fe models. There is a DUH sign in the window also :)

    Times are tough for all automakers.

  • avatar
    kurtamaxxguy

    Insurance companies already make decisions about which cars should cost the most to insure.

    Given the miserable economic climate, and banks claiming they have no money to lend (I leave it to others to explain why), there’s no surprise car loans are treated similarly.

    Now what happens if GM crashes and burns? What does TTAC want to __see__ happen? Should something Phoenix-like rise from the ashes?

  • avatar
    Eric_Stepans

    Wolven wrote:

    Third; This is just a blatant attempt to enforce the enviro whack jobs jihad against American automobiles, particularly the SUV.

    I encourage you to reconsider that statement. I think if you surveyed the management of various banks and finance companies, the ‘enviro whack job’ contingent would be quite small.

    OTOH, the bankers were able to get the current administration to sneak them a $150 billion tax break (note: that’s a giveaway six times greater than the amount of money that the Detroit 3 would borrow under the general bailout parameters)

    http://www.ombwatch.org/article/blogs/entry/5522

  • avatar
    BuzzDog

    Eric_Stepans wrote:

    I think if you surveyed the management of various banks and finance companies, the ‘enviro whack job’ contingent would be quite small.

    For some reason I missed that allegation in Wolven’s post, and Eric makes another excellent point. Of all of the bank executives I work with, most own at least one domestic SUV – usually a full-size GM or Ford. Further, it’s extremely unusual for bank-owned vehicles to be anything other than a GM, Ford or Chrysler product.

    Much of that last statement has to do with the fact that the domestic automakers cater to fleet sales (lately at their peril, as resale values suffer), but it’s safe to say that U.S. banks are definitely not biased against the U.S. auto industry. Bankers would be shooting themselves in the foot if they were to develop such a bias, as too many people who pay their salaries (in other words, customers) are employed by or work as a supplier to the auto industry.

  • avatar
    jerry weber

    I think the dodge dealer is onto something with the buy a new Dodge ram (preferably a 2009) and get a 20008 ram free. This lets you see all the improvements made for 2009 for yourself. It allows you to invite your neighbors over to do side by side testing. Finally, you and your friends can start your own auto magazine with your first issue covered in content on the new dodge ram.

  • avatar
    Kendahl

    Wolven:

    If you default on a car loan, the banker must repossess the car and sell it to recover the bank’s money. Therefore, the market value of the used car should set a cap on the amount of money to be loaned. In another TTAC thread, GMAC told the owner of a 5 year old Yukon that it was worth only $2,000. A banker would be nuts to loan you more than $1,000 or $1,500 to buy it.

  • avatar
    SunnyvaleCA

    Wolven writes: The issue for the bank SHOULD be, can the borrower repay the loan. And THAT is the issue regarding the home loan mess. NOT what the value of the house was.

    Here in California home mortgages are of the “no recourse” variety, which means that the bank, after repossessing a house, isn’t allowed to go after the other assets or revenue streams of the homeowner. The “no recourse” language is written into the original loan documents by the banks, and the bank is clearly aware of the ramifications. Many banks have been writing loans for decades, write thousands of loan contracts each year, and have teams of lawyers; if the banks don’t understand the contracts that they themselves wrote, that is their own fault.

    Consider the dynamics of a “no recourse” home loan with respect to the concept of “the bank should [consider whether] the borrower can repay the loan”:
    * If a homeowner has lots of money or a huge income, but decides to give the home back to the bank, the bank cannot go after the homeowner’s assets or income regardless of the owner’s ability to pay the mortgage. That’s in the contract that the bank wrote.
    * If the bank receives a home back from the homeowner, the bank will sell the home. The bank is entitled to collect all the money from the sale up to the value of the loan; any extra money has to be given back to the homeowner. If the sale of the home doesn’t bring as much as the loan value, the bank loses that difference. That’s in the contract that the bank wrote.
    * If a house goes up in value (or at least exceeds the loan amount plus down payment), a bank can recoup all of its losses if the homeowner goes bankrupt or stops making mortgage payments. There is some hassle for the bank (for which the bank can charge the homeowner?), but the bank will get all of the loaned money back in the case of foreclosure of an above-water house. That’s in the contract that the bank wrote.
    * Repossessing houses and whatnot is a hassle for the bank. However, the bank charges fees for various part of the loan. If the bank is worried about hassle down the road, they can opt to not offer a loan contract or they can ask for more money up front to cover possible hassle later on.

    Summary: The ability of the homeowner to repay has little bearing on the bank’s financial safety because the homeowner may default regardless of ability to pay if the home is under water. Further, if the homeowner defaults (whether unable to pay or simply unwilling to repay), the bank can make up the loan amount contingent on the value of the house and only on the value of the house. That’s in the contract that the bank wrote.

    Conclusion: The issue for a “no recourse” loan is the value of the house relative to the loan amount. The ability of the borrower to repay the loan has almost no bearing on the bank’s risk.

    Disclosure: My shack is still above water, especially considering the 20% down payment. If my house went underwater, I would gladly hand over my keys and walk away while honoring the contract that the bank wrote.

  • avatar
    Wolven

    My comments were made with the assumption that “of course” the bank isn’t going to loan more on an asset held for collateral (house or car) than they can reasonably expect to get should they have to foreclose and sell that asset.

    That’s not the issue here. According to the article, banks are REFUSING to loan money on CERTAIN vehicles… PERIOD. REGARDLESS of what the market says the value of the vehicle is, the BANK is arguing that it’s worthless either because it’s American made or it’s not fuel efficient enough to suit them. And THAT is BULL$HIT.

    There’s no difference between that blatant bias and taking the stand that they’re not going to loan to blacks because, well, because they just ain’t historically economically stable enough to suit the bank…

    Again, I think anyone that has an account at Bank of America or any other bank REDLINING certain vehicles should go close out their account immediately. This is blatant discrimination and should not be tolerated.

  • avatar
    MikeInCanada

    Discrimination against people – I would like to think that I’m an opponent of this. Discrimination against Buicks…not so much.

  • avatar
    SunnyvaleCA

    Wolven… I think I might have been a bit off the main topic with my previous post. Sorry about that. I agree with you that redlining is bad public relations, bad business, and (in some cases) illegal.

    I can only speculate that loan companies might hold certain parts of the loan calculations at a fixed value to simplify. If a vehicle’s depreciation is very bad and some aspects of the loan calculation are fixed, then the calculation might skew other variables off the charts. Perhaps the calculations dictate that a loan be offered for a certain vehicle at 25% interest rate, but state laws might dictate that interest rates for new car loans can’t exceed 20%. In that case the loan company could do a whole different set of loans by adjusting other areas of the loan, or they might just cross it off the list. In this case, it looks like they just cross it off the list.

  • avatar
    Landcrusher

    It would be good to hear from one of the B&B’s in the know on what sort of math a repossession looks like with an auto loan.

    I will take a wild ass guess.

    New GM SUV list 45k, purchase 35k (reasonable?)

    Now, lets say the banks get smart again, and demand 10% down no matter what the price (why they got away from this is curious to me). At present depreciation, the owner will be upside down in less than a year. If in that time, GM goes bankrupt, they could get a whole lot of people walking in with the keys.

    Their terms would have to be something like 50% down, 36 months. At that rate, they would get so few takers it’s just easier to readline them.

  • avatar
    KixStart

    wolven, Just because multiple people or groups arrive at the same decision doesn’t mean “conspiracy.” Sometimes, it just means that the facts are there to support that decision.

    GM, Ford, Chrysler were propped up by bad lending practices at their captive finance arms. You need a 130% loan to do the deal? OK, we can arrange that. Now that credit has tightened only the best lonas go through… sweet deals on vehicles with unknown future value are a thing of the past.

    A frind bought a Honda Accord a couple years ago. I know he likes to shift for himself but he bought an auto. I asked, “Why?”

    “Because with an auto, these things are like cash.”

    That is the kind of vehicle that banks prefer for collateral. That is not what GM, Ford and Chrysler are supplying at the moment.


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