By on April 13, 2012

The collapse of the house of cards built with subprime mortgages was a central reason for the 2008 crash. GM’s GMAC was brought down by subprime loans. The economy has not quite recovered, and the deck of cards is again being used as building material. Back in the high-risk game: General Motors.

Writes the New York Times:

“As financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM.

Consumer advocates and lawyers worry that the financial institutions are again preying on the most vulnerable and least financially sophisticated borrowers, who are often willing to take out credit at any cost.

‘These people are addicted to credit, and banks are pushing it,’ said Charles Juntikka, a bankruptcy lawyer in Manhattan.”

Other people worry that GM fell off the wagon, and is getting a fix on the same old junk. Continues the Times:

“Moody’s was already sounding the alarm last year that some very risky borrowers were getting auto loans. The market, Moody’s wrote in a report in March 2011, could be growing “too much too fast.”

Steve Bowman, the chief credit and risk officer for GM Financial, expects subprime auto loans continue to grow. GM Financial openly flaunts its return to the subprime poker table. On its website, GM Financial says:

“When it comes to subprime auto financing, GM Financial is the perfect fit … Today, over 40 percent of Americans are in need of subprime financing options. And, according to A.T. Kearney’s 15th Annual Automotive Study, the economic downturn of 2008-2009 resulted in an additional 15 million Americans being classified as subprime.”

There is nothing wrong with having a well-managed captive finance arm. Ford Credit is one example. A captive finance arm can provide profits and increase customer loyalty. It is not without risks however. In the wrong or desperate hands, it can get more dangerous than crack. Customers can default. Overly optimistic residuals can break the bank. A parent that is desperate for gaining market share can prod its financing arm into making riskier and riskier bets until the house of cards comes crashing down – again.

Forbes says that subprime lending is “not such a bad thing,” and that “the most important thing for lenders is to keep the lessons learned from 2008 crisis fresh in their memory.” It seems like the only lesson GM Financial has learned is that the 2008 crisis was just the right thing to produce 15 million additional subprime marks.

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38 Comments on “The Return Of Subprime: GM Getting High On Junk Again...”


  • avatar
    Ralph SS

    Well, if you did this once, and those responsible were rewarded, and the companies bailed out, why would you not do it again?

    • 0 avatar
      KGrGunMan

      I agree, where’s the harm for GM? They’re too big to fail, so if it does not work the 2nd time they’ll get bailed out again.
      The best case is they win and make money off the risk, the worst case is the government washes away the risk and they break even. If casinos were like this i’d be there betting everything i had right now. It’s a win-draw scenario, there are no loosers in this game…other then the american people.

  • avatar
    DC Bruce

    I wonder if the NY Times realizes how close statements like these come to statements made by white residents of Southern States in the U.S.in the 1950s to the effect that literacy tests as a prerequisite for being eligible to vote were necessary in order to insure that there was an informed electorate. Of course, in practice, these were used to keep the descendants of slaves from voting.

    A person is a “victim” if he suffers injury as a result of some action done to him against his will. Is the NYT suggesting that people buying cars on credit are doing so against their will and thereby becoming “victims of predatory lending practices”?

    The problem with subprime lending wasn’t that it was risky. The problem was that the risks were concealed and/or understated when the loans were bundled and resold to others, resulting in a mis-pricing of the loans. The loans would have been much more expensive had the risks been properly disclosed and evaluated.

    Right now, in the United States, credit is cheap — to buy a house or to buy a car. The problem is almost no one can get it . . . thanks to a myriad of government regulations, etc.

    I’m sure the NY Times would consider our very own Mr. Lang a predatory lender, since it appears that he extends credits to “uncreditworthy” customers. I guess the Times would sooner see Mr. Lang’s customers walk or ride a bicycle than sign one of his “predatory” loans to buy a car from him.

  • avatar
    KixStart

    Didn’t we see a story, not too long ago, about consumers paying off auto loans while letting mortgates go unpaid?

    If that’s truly representative of consumer behavior, auto loans could be considered less risky than some other loans. And the loan is secured by a physical asset of some value.

    Consequently, in a situation where you wouldn’t extend revolving credit or a home loan, an auto loan might not be quite as imprudent.

    I’d be much more concerned if there was a lot of handwaving going on and customers who were bringing in dead Cobalts on which they were $5K upside down were having that negative equity rolled into a loan on a new car.

  • avatar
    Geekcarlover

    A few years ago I remember almost every commercial break on radio or TV having some dealer asking “Need a new car? Had a job for a year? Congratulations, YOU’RE APPROVED!!! ” They went away when the banks started doing crazy stuff like checking credit histories. Now they’re back. I’m not sure if it’s an uptick in lending or a sign of desperation by dealers to move some iron. I can only hope they learned from last time, but probably not.

    • 0 avatar
      wsn

      “I can only hope they learned from last time, but probably not.”

      Why should they? Those who saved were penalized and those who over spent were rewarded.

  • avatar
    rpol35

    “The economy has not quite recovered, and the deck of cards is again being used as building material. Back in the high-risk game: General Motors.”

    Actually the U.S Government is back in it (Freddie & Fannie anyone?) since they own 73% of the former GMAC which is now called Ally Financial Inc. Cerberus owns a bit too with the non-government owned part of GM with the tiny remainder.

  • avatar
    GS650G

    The notion of predatory lending is misleading. No one stalked these people and forced them to borrow a dime. If the terms were a bad deal for the borrower then they have turned out to be a worse deal for the lender. Maybe a more accurate term is predatory borrowing where people lied about income, bills, and intentions in order to get big bucks to finance their lives.

    When you owe the bank a few thousand, that’s a big problem for you. When you owe hundreds of thousands, it’s a big problem for the bank.

    • 0 avatar
      gslippy

      “When you owe the bank a few thousand, that’s a big problem for you. When you owe hundreds of thousands, it’s a big problem for the bank.”

      This is true, and I think the thrust of the article is that derelict consumers will lose their vehicles, and lenders making millions of dollars of loans like this will lose their banks.

    • 0 avatar
      Pch101

      “The notion of predatory lending is misleading.”

      Predatory lending exists. But it is coming from BHPH lots and certain types of finance companies, not out of the captive finance arms of the automakers.

      Predatory lenders engineer their loans in order to encourage default and to profit from it. It happens, but that isn’t happening here.

    • 0 avatar
      benzaholic

      Predatory lending certainly does exist.
      Those who are much more familiar with how the financing game works prey on those consumers who for one reason or another are too ignorant about how the financing game works.

      Years ago while browsing at a dealership, I swear to (insert desired deity here) I overheard the following exchange between a prospective buyer and the dealership folks. It was at a new car dealer, but I think they were discussing a used car.

      Buyer: Can we do this for X dollars a month for 4 years?
      Salesman: Let me check.
      .
      .
      Salesman: No, but we can do that same X dollars a month for 5 years.

      With the numbers they were discussing, the four year deal should have worked, or at least the five year deal should have reduced the monthly payments.

      Less mathematically ignorant consumers would prevent a whole lot of truly predatory lending behavior, but I’m not holding my breath.

      • 0 avatar
        Pch101

        Variations of that are very common on car lots. But that isn’t an example of predatory lending.

        A predatory loan is a loan that is designed to default. Usually, the end game for the lender is to get some sort of initial cash out of the deal, then collect a few payments before finding an excuse to take the collateral.

        This sort of thing will happen on BHPH lots. The buyer puts down some sort of down payment, but then gets put on an impossible payment schedule that is almost sure to end badly. The loan predictably goes into default, the BHPH lot repos the car, then repeats the “sales” process with a new “buyer.”

        It essentially becomes an overpriced rental business, disguised as a sales lot. For the amount of time that the buyer has the car, he could have rented it from Rent A Wreck for less money. Meanwhile, the BHPH churns the car through multiple buyers, scoring cash from each of them. They make more money from those who default than from those who don’t.

      • 0 avatar
        Russycle

        There’s another twist to predatory lending: Sell a loan that the borrower won’t be able to payoff then slice it and dice it and bundle it with other loans and sell it to some poor sucker so when it all goes south it’s no longer your problem. Happened to a friend of mine. Sure, he should have read the fine print, all 200 pages of it, but he chose to trust his mortgage broker who forgot to mention that in 2 years his monthly mortgage payment would quintuple. Multiply that by a million and you get the Crash of 2008.

        You’d think our socialist, anti-business president would have imposed strict regulations to stop that sort of thing. Strangely, that hasn’t happened….

      • 0 avatar
        golden2husky

        Predatory lending not only exists, it is flourishing. Now you could argue that you should not be over extending yourself and you should responsible with credit. And you would be correct. But you should also not gamble and drink to excess, smoke, or run with scissors. But people do it all the time. Just like cigarette makers know that the teen years are critical to trapping a new group of lifetime addicts, the credit card folks know how to troll the profiles of their customers to ensnare the unwary into a non stop spiral of debt. Capital One is a master at it. Anybody who has a Capital One card should do a credit check of themselves. You will be amazed at how many times they check your credit. For me, they checked 19 times in three years. This on a customer who never carries a balance and has never been late. Somebody I know has a 13K balance on a Capital One card. They get balance transfer check offers all the time, and offers for 0% for a year on new purchases. Of course the higher rate balance must be paid off first, so the 0% will run out before a single penny is paid off. This is classic entrapment at its finest. Now pity the poor schmuck who is late a couple of times and gets a 25.99% default rate. They will be paying that off until they are dead. Anybody with any sympathy for these bastards is a heartless fool. Telling those who get into this trap to “manage their credit properly” is like telling an alcoholic to manage their drinking properly. Anybody recall the bankruptcy law restructuring of a number of years (2005?) ago? Turns out that more than half of those with the need to declare bankruptcy had to do so because of crippling medical bills. Then-Senator Kennedy wanted to insert an exception to the new laws that would make a provision for those with medical bills. The “pro business” industrialist president and every Republican (plus a few Dems) didn’t like the idea and the gift the the credit industry sailed through.

        BTW, there is nothing wrong with a lender having some “subprime” loans as part of their portfolio of loans. Not all suprime folks are deadbeats. However, if subprime is what yoy are building your business on, well….

  • avatar
    Pch101

    “The collapse of the house of cards built with subprime mortgages was a central reason for the 2008 crash.”

    That’s a rather simplistic (and Fox Newsesque) spin on what happened. Faulting the Negroes for the housing crisis (as if inner-city minorities were able to dupe investment bankers en masse) is entertaining for folks of a certain political persuasion, but it doesn’t really explain what happened.

    Subprime debt is fine if it is well managed and correctly priced. But during the last decade, pretty much all forms of debt were mismanaged at the systemic level. Too many people of all sorts were provided with entirely too much credit, with too little equity and at too low of a price, while the level of risk was not reflected in the pricing.

    This phenomenon had more to do with the pace of global economic growth than with central banking or dark-skinned borrowers. The global economy grows by about a trillion dollars per year, and that money wants a home. In theory, debt is less risky than equity, so it’s not a surprise that a lot of that growth got converted into loans. That, in turn, places a lot of pressure on funds to provide that debt with a AAA rating, even though very little consumer debt is worthy of such a label.

    • 0 avatar
      TW4

      Are you still living in the 1980s? The CRA is about redlining? A majority of subprime loans are government-backed?

      The CRA has not been about redlining since the mid 1990s. The CRA is part of a massive system of Federal regulations that heavily subsidize the housing industry to create manufacturing and construction jobs in an “outsource proof” industry and insulate American workers from Chinese currency manipulation.

      Bashing subprime lending is not directly related to the CRA. Bashing the CRA for its loose lending rules is not directly related to redlining or race relations. Those things were decoupled a decade ago.

  • avatar
    Darkhorse

    As long as the Fed is keeping interest rates at basically zero, this behavior will continue. Interest spreads of 10% or more are irresistable, at least until the defaults start.

    • 0 avatar
      Pch101

      “As long as the Fed is keeping interest rates at basically zero, this behavior will continue.”

      Between late June 2003 and the end of 2005, the Fed increased the overnight rate by 3.25% (1% to 4.25%).

      Over the same period, the rate of an average 30 year fixed mortgage increased by only 0.52%.

      The Fed doesn’t control the retail price of money. If the market wants to lend at volume and there are few regulations to curtail it, then there will be more loans, regardless of what the Fed may want.

      http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

      http://research.stlouisfed.org/fred2/data/MORTGAGE1US.txt

  • avatar
    tced2

    I still wonder why a “captive finance arm” of an automobile company would be financing houses. I know the answer. Greed. And GMAC got burned in that respect. The mothership GM sold (quite a bit?) GMAC before the 2008 credit crisis. I would certainly like to be a fly on the wall in the Cerebus executive suite…GMAC….Chrysler. Cerebus made some really bad “investments”.

  • avatar
    Glenn Mercer

    I agree.

    But I can’t risk raising at least the potential for some bad jokes about mobile-homes or double-wides qualifying as vehicles in GMAC’s view (grin). I can imagine the discussion: “Isn’t a house just a permanently parked car? Doors, windows, carpets, air conditioning…. all the same stuff!”

    • 0 avatar
      Type57SC

      GMAC? That’s not what the article is about. GMAC is not controlled by GM anymore. It’s about GM Financial, which is the old AmeriCredit, one of the biggest deep subprime lenders around. So it is not surprising at all that GM Financial would look like they are doing a lot of Subprime. That’s exactly what they were doing when GM bought them.

  • avatar
    PenguinBoy

    From the referenced article:
    “But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.”

    It sounds like a number of lenders are taking part in this “return to risk”.

    Also:
    “Auto loans are particularly attractive for lenders since they were largely untouched by many of the new regulations.”

    It sounds like Auto loans are less regulated, and thus make sense for sub prime lenders.

    Although the GM captive finance arm is named in the article, it is reasonable to conclude they are not the only one. Is there anything to suggest that GM is more dependant on sub prime customers than other automakers?

    • 0 avatar
      APaGttH

      And you’re asking the right questions. Toyota writes paper down to FICO 520 right now, 100% of purchase price. Even more stunning, they are doing leases down to FICO 520. These Zone 7 loans are written to those customers from FICO 520 to FICO 579.

      The bigger question is, how many of those loans by any maker are written to people down in the toilet.

  • avatar
    Point Given

    I’ve seen some people get destroyed in our subprime office (nissan dealer in Canada). 29.8% interest on a car loan. I believe strongly in personal responsibility so it’s up to the consumer to realize what they are doing but more often than not you wonder if the people truly comprehend what they are doing to themselves.

    I’m worried about GM falling back into the old rut. Stupid residuals (at one point losing 1 billion per month on lease returns) and lowering credit standards to get more people approved…..

    . As one person said if they did this before, failed, got bailed out, did they really learn anything?

    • 0 avatar
      PenguinBoy

      “I’ve seen some people get destroyed in our subprime office (nissan dealer in Canada).”
      My point exactly.

      The article implies that GM relies disproportionately on subprime lending, but I don’t see any real evidence that it does. With Carlos Ghosn calling for rapid growth in Canadian market share*, I could see Nissan relying even more on subprime financing in the near future. And HypnoToad’s comments show that Toyota seems to be reaching out to subprime customers as well.

      This is not to say that excessive reliance on subprime loans to juice market share is a good thing – it’s not – I just don’t think it is unique to GM.
      ______________________________
      *Reference: http://m.theglobeandmail.com/report-on-business/ghosn-raps-nissan-canada-performance/article2257432/?service=mobile

  • avatar
    APaGttH

    I see, Toyota writes paper down to FICO 520 – no issues there.

    Toyota Financial Services Rates for purchase and lease last updated on 4/13/2012…

    http://www.avondalescion.com/Finance-Rates.aspx

    FICO 520. NO problem. 100% financing at 20.70% is available to you to buy your Scion FR-S right now. Never mind that you have to try really hard to get your FICO score down to 520, and that 20.70% on a 5 year car loan is criminal but golly gee, where is the NYT story and the all to eager reprint from TTAC on how Toyota is selling cars to anyone who can leave a small patch of moisture on a mirror when held up to their mouth.

    And doesn’t Chrysler use Ally Financial? What is Ally doing there or is just GM bashing on writing car loans to anyone the fashionable thing to do.

  • avatar
    highdesertcat

    GM has to do something! They’re not doing well just making and selling cars because whatever money they make in profits is flushed down the drain by various operating losses, here and abroad.

    This is a desperate attempt to help right the ship. But, unless the job market improves and the economy picks up we’re going to see a lot of people default on their loans because of various reasons like job loss, underemployment, ARM resets, the ever-increasing cost of rice&rent, etc etc.

    And since C4C has destroyed the used-car market for the less well-heeled in our society, how is extending new-car loans to people who can’t make ends meet going to help?

    It’s trickle-up poverty. How’s that for hope and change?

    • 0 avatar
      golden2husky

      Come on, really. C4C removed a deck chair off the Titanic in terms of vehicles destroyed vs the full used vehicle market. But you do bring up a good point about the lower economic tier being hurt by the lack of affordable older used vehicles. Destroying them was very wasteful. I would have thought that instead of destroying them, a better thing to do would have been to take them and give them to the truly working poor. Take the “poor” guy’s real clunker, destroy that, and trade them a C4C vehicle. You would have taken a vehicle that was likely a safety, emission, and reliability issue off the road and given a decent vehicle to someone who needs a reliable means of getting to work. Trickle down common sense. Unlike giving the wealthiest the lion’s share of a tax break.

      • 0 avatar
        highdesertcat

        Before my brothers retired from new-car retail last year, they got a lot of pressure from their distributors and OEMs to “make things happen”. It wasn’t just the two domestic auto manufacturers, but the foreigners and transplants as well.

        Often Credit Unions and local banks would jump into the fray to extend loans at outrageous APRs to people who would not otherwise qualify for a new-car loan (and not at all for a used-car loan).

        Those people would otherwise have gone to the used-car market if there had been an adequate supply of used-cars in the regions where they had their dealerships (CA, AZ, TX and AL).

        The C4C cars that were taken in and ultimately destroyed were not all bad, and whatever number was removed from the used-car market was never replaced, or were replaced with inferior vehicles.

        In the end, many people actively seeking to buy a decent used car were forced to go to private parties or used-car dealerships that did not have to conform to the levels of reputable dealers.

        The full used-car market has not yet recovered from the damage done by C4C, even if C4C numbers were relatively small in the overall scheme of US auto sales.

  • avatar
    chicagoland

    The current car biz #’s to advertise are “$XYZ.99 a month!” Used cars now have payments instead of actual price stickers, even at new car stores. As an above post says the dealers push longer terms, “we can do your payment, but for has to be for 72 months”.

  • avatar
    Point Given

    It’s been advertising payments for a long time. The whole goal is to knock you off price and onto payments. It’s how dealers get you for a few bucks more.
    When I was in retail (I’m fleet/commercial) we’d ask customers what do they want their payments to be, then we’d ask “Up to??” at whatever they answered. You’d be suprised how many people would bump themselves $50 a month.

    A Kia sales manager friend of mine says his best salesman would ask the payment question, then get $250 as an answer, then say “up to?” and they’d say $300. He’d come back at 309×96 months and the customer would sign. People make strange decisions.

    • 0 avatar
      redav

      The country has a real problem with innumeracy (being illiterate with numbers). What you describe is the same phenomenon as the lottery being a tax on people who are bad at math. People who are innumerate are taken advantage of just like people who are illiterate.

      I once went into a Toyota dealership with my father when he was looking for new truck. The salesman kept pushing us on monthly payment and refused to tell us what the price was. Eventually, we got that out of him, and I noticed how askew the payment & price were. I asked what the interest rate was, and he said “It’s good. It is a very good interest rate.” I went home and back-calculated it–it was over 17%. People who do not know how to check these things are ripe to be abused.

  • avatar
    oldyak

    yep..their at it again!
    My recent credit score is WAY TOO HIGH!!!!!!
    I should be proud but Ive become rather cynical since
    I pulled the score(its been 2 years)and damn near fell out of my chair!!!
    Me thinks the banks are being pressured to get the economy jump started and that’s not a good thing!

  • avatar
    doctor olds

    Subprime mortgage loan defaults were the basis for the credit default swap problems that created the financial crisis of 2008.
    There is no cause for concern about subprime car loans. Vehicles can easily be repossessed and most subprime car loans are actually being repaid.

    The situation with vehicles is quite different from that of the housing bubble. While subprime (and any other) mortgage defaults have caused a glut of houses that can’t be sold for what is owed, that situation does not exist with vehicles. A vehicle loan default simply results in repossession and resale into a market with very strong used values.

    GM recognized the competitive disadvantage of not having a captive credit arm, as most makers sell to subprime customers. GM acquired GM Financial specifically to address this disadvantage.

    • 0 avatar
      PenguinBoy

      Agreed that subprime mortgages are a bigger worry than subprime car loans.

      Here in Canada there still seems to be a brisk business in “subprime mortgages” – only we don’t call them by that name. The problem is so bad that Bank of Canada governor Mark Carney “views record high household debt the number one domestic risk to the economy”*, but the banks keep writing “sub prime” mortgages because the taxpayer takes all the risk through the CMHC**.

      This reckless behaviour worries me a *lot* more than any bailouts of automakers, or companies like Nissan using sub prime financing to juice sales of otherwise uncompetitive models.
      ______________________________________
      *http://www.theglobeandmail.com/report-on-business/carney-ready-to-step-in-if-debt-levels-get-out-of-hand/article2394048/

      **http://en.wikipedia.org/wiki/Canada_Mortgage_and_Housing_Corporation

      • 0 avatar
        doctor olds

        Subprime mortgages were not a problem until the real estate bubble burst. In other words, a bank did not have much concern about default if the property was going up in value and could be resold to recover their money. That all changed with the collapse of home values in the midst of the “great recession”. Canada may not have that problem, if home values are strong.

        I have forgotten the number, but recall a surprisingly high share of new car loans are typically issued to subprime borrowers, not just for slow sellers, but for all purchases.

    • 0 avatar
      Type57SC

      It’s nice to see that someone who has thought it through. that’s exactly what should have been in the article.

      • 0 avatar
        doctor olds

        @Type57SC- GM acquired GM Financial for the very reason to have more flexibility with subprime auto loans, as do competiors, including Toyota and Chrysler as mentioned above.

        It is disappointing to see this block and so many other weak minded comments about subprime auto loans in the same breath as subprime mortgages. The issues and risks are quite different. The auto collapse was a direct resultof the financial crisis and credit freeze, not defaults on subprime auto loans.


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