By on March 25, 2014

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Subprime auto financing continues to grow, and while one analyst at Moody’s says that banks are largely staying out of the subprime space, overall lending continued to rise, with retail banks seeing some of the strongest growth. This expansion in lending, particularly subprime, was attributed as a key driver in auto sales. SNL cited forecasts for a SAAR of between 16 and 16.7 million in 2014, up from 15.5 million in 2013.

SNL Financial, a finance industry trade publication, directly attributed strong auto sales to the increase in subprime financing, drawing a connection between the increased SAAR and an increase the portfolios of subprime lenders. Consumer Portfolio Services Inc saw a 37 percent growth in receivables year-over-year, with over $1.2 billion in receivables for Q4 2014.

The increase in subprime lending along with looser underwriting standards has led ratings agencies to view the sector in a negative light. Fitch, which has issued a negative outlook in the sector as a whole, told SNL that overall, losses were at “historical lows” and that the increase in lenders will make the segment more competitive.

SNL also reports that Moody’s has cast an eye on underwriting standards, with Moody’s VP Mark Wasden stating that longer loan terms (due to higher prices, more durable cars and increased ownership periods) is a major factor.

While Wasden noted that banks were remaining “relatively conservative” regarding subprime lending, savings banks saw the biggest growth in overall lending among depository institutions, growing 16.06 percent year over year (compared to 11.24 percent for credit unions and 10.04 percent for commercial banks). Even so, commercial banks remained the dominant force, issuing $331.92 billion in loans, with savings banks accounting for just $21.49 billion.

Another notable development is the increasing reliance of GM Financial on General Motors – while this sounds redundant, General Motors vehicle financing now accounts from 70 percent of GM Financial’s business, and receivables have more than doubled to $33 billion in Q4 2013 from just $13 billion a few years ago. GM Financial, once known as AmeriCredit Corp, was largely a subprime focused business when GM bought it in 2010, but plans are underway to transition GM Financial to prime lending. While GM Financial is now stepping into the role that the legendary GMAC once occupied, Ally (GMAC’s successor), is shrinking from the auto lending market, suggesting a reversal of roles for GM’s two finance arms .

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48 Comments on “Subprime Lending Still On The Rise As GM Financial Grows Prime Lending Operations...”


  • avatar
    LALoser

    One way to move the new full sized trucks….in my best snarky voice..

    • 0 avatar
      th009

      Note that GMF is doing PRIME lending, not subprime.

      • 0 avatar
        APaGttH

        Yes, but to anyone skimming the headline – the impression isn’t very clear that GM Financial is moving into prime financing.

      • 0 avatar

        I’m not sure the readers here understand the difference between BH/PH and LH/PH versus sub prime and near prime. But AmeriCredit always specialized in credit that had some warts. Even a PRIME credit score, defined by a score over 720, isn’t always “fast trackable.” Some times DTI percentages make 750 scores a ticking credit time bomb.

        The definitions aren’t universal in terms of scores, which also confuses things. If we start from the bottom, almost a third of consumers are in the BHPH category, which means a third of those go into default and turn into repossessions. None of this is a major problem as long as the risk is properly priced.

        Consumers prefer to think credit is a simple thing. It ain’t. Often dealers can get financing accomplished for consumers they can’t get done for themselves. Whether that’s a good thing or not is another debate. But the fact is, only about 20% of consumers are a slam dunk credit approval without documentation, additional money down, job letters, tax returns, etc. Many consumers think they are bullet proof, but they aren’t. This is one of the biggest impediments to online direct from the factory auto sales. Many have tried and others will continue to try.

        We could always return to the days when credit applicants were either approved or denied. In those days the folks with the best credit scores had no advantage over those who didn’t. Tiering allowed more people to gain financing, although the lower credit tiers paid higher interest rates reflective of the additional costs to service their loan. Collection issues increase lender costs. And it ain’t cheap to originate car loans, which is the role dealers play quite well. Yes, they make money doing it. They “buy” the money at “wholesale,” rates consumers can’t get on their own. The margin covers the cost of shopping applications to best advantage. Consumers are all free to shop and get their own financing ahead of their visit to the auto dealership.

        What never ceases to amaze me is when consumers take a factory subvented rate instead of a rebate and a market rate when the rebate clearly is the better deal.

        • 0 avatar
          ellomdian

          Given the stability of used car prices lately, I have to wonder why we are still using risk models that assume a significant loss in value over the first few years of ownership. There is still a cost in recovering the vehicle (and selling it,) but most subprime loans still seem based on the risk of absolute total-loss of the asset.

          • 0 avatar

            Because the current pre-owned value situation is an anomaly. A better question, IMHO, is why lenders still treat rebates as real down payment.

        • 0 avatar
          GS650G

          Or maybe new cars are too expensive and people should be buying used or keeping their current ride a little longer. There are many ways to finance a car purchase.

          I don’t recall the “days” when buyers were arbitrarily approved or denied, surely the finance people in car dealers work there too and it’s in their interest to approve people with good credit and a down payment.

          I have no love for those who massage payments, trade in, and rebate numbers in an attempt to reel in people who probably shouldn’t be buying the car anyway.

        • 0 avatar

          > They “buy” the money at “wholesale,” rates consumers can’t get on their own.

          Other than perhaps convenience, dealers aren’t going to be more efficient bankers than banks.

        • 0 avatar

          > What never ceases to amaze me is when consumers take a factory subvented rate instead of a rebate and a market rate when the rebate clearly is the better deal.

          That pretty much answers why people get financing at the dealership. People are dumb.

          • 0 avatar
            daver277

            The entire auto industry thrives on dumb/gullible people.

            W/out them, 95% of the vehicles out there would be pragmatic and folks could retire 10 years earlier.

          • 0 avatar

            Many get a better deal at the dealership than they can get on their own. And that’s not so dumb. What is dumb is limiting oneself to non dealership financing, thereby reducing one’s options. But whatever a consumer decides, its their choice. They get to shop with no guarantee they will make the right decision.

          • 0 avatar
            brettc

            I’m confused by your statement. Manufacturers often offer 0%, 0.9%, etc. When we bought our newest car in December of last year we got 0.9% from VW Credit while the lowest we could find at a bank/credit union was in the 1.75% range. So taking dealer financing is not necessarily a bad thing if people do their homework before walking on to the lot.

          • 0 avatar

            Sometimes taking the rebate is the better deal, sometime it isn’t.

  • avatar
    elimgarak

    these vermin never learn do they.

  • avatar

    Here’s how you explain it:

    Wall street started bundling home loans together, “mortgage backed securities” and selling slices of those loans to investors. They were making big money…so they started pushing the lenders to make more loans.

    The lenders had already given loans to borrowers with good credit – so they go bottom feeding – they lower their criteria…
    Before, you needed a credit score of 620 and a down payment of 20%. Now they’ll settle for a 500 with no money down.

    The buyer, a regular guy on the street, assumes the banks know what they’re doing. He reaches for the American dream of owning a home.
    The banks knew securities based on crap loans were risky so to control the risk they started buying a new kind of insurance called the credit default swap. This allowed them to remove risk from their books and make more loans. They could make even MORE money.

    One company was dumb enough to take on an unbelievable amount of risk…AIG. The teaser rate on the poor schlub who bought his home readjusts and goes up. He can’t pay. He defaults. Mortgage backed securities tank and AIG has to pay off all the banks they insured – all of them – all over the world – at the same time.

    AIG can’t pay up. All the banks book massive losses on the same day – and then they go under.

    The whole financial system goes down.

    • 0 avatar

      Well you got some of this right but missed the big picture. AIG got killed with its aggressive credit default swaps. In fact, the entire mortgage bubble and crisis was rooted in credit default swaps. In the 1990s, the Chairman of the Commodities and Futures Trading Commission sought to regulate CDS. She actually thought issuers of CDSs should be required to reserve capital to pay potential claims. What a concept. Alan Greenspan, Art Leavitt, Phil Gramm, and a host of RW economic theorists blocked the attempt and had her “broomed.” Without the unregulated credit default swaps the Wall Street securitizers don’t get the coveted AAA rating they needed to take Fannie and Freddie out of competition of mortgages. Through it all F&F were NEVER able to buy the kind of risky stuff Wall Street bought and sold routinely. In fact CRA caliber loans have outperformed the mortgage market overall. A CRA mortgage is NOT a JUMBO, an Alt A, a Reverse AMO, a NINJA, Interest Only, etc. etc. Only 16% of mortgages made during the bubble period were made by CRA regulated lenders. And only a small percentage of those were CRA. CRA regulated lenders were NEVER required to hold CRA mortgages, and were free to sell them upstream to the securitizers.

      IG was decimated by its own CDSs. When the defaults came, they ran out of capital to pay claims quickly. It is important to note that the taxpayers made a profit on the AIG deal. TARP is also in the black.

      I’m not sure exactly what this has to do with auto loans. There IS some bearing, but its time for supper. Later.

      • 0 avatar
        APaGttH

        Bingo. When you look at how credit default swaps operate it is stunning when you step back and realize, that this was legal.

        What’s even more stunning is fundamentally nothing has changed since 2008, and the practice, although not at the same level of aggression, still goes on today.

        • 0 avatar
          jkross22

          Why would it not be illegal now? The big money has spoken and they want risky investments to stay.

          It’s the same reason why Glass-Steagall (all 37 pages of it) hasn’t returned.

        • 0 avatar

          > Bingo. When you look at how credit default swaps operate it is stunning when you step back and realize, that this was legal.

          CDSs are technically a valid financial instrument. The problem is when insurance is used for risk-taking instead of risk mitigation.

          The specific nuances are where regulation & oversight is most necessary, and high finance is essentially self-regulated.

        • 0 avatar

          Some could make the case that securitization is the problem. After all, if one is not going to actually hold paper and service a mortgage there is no real need to make loans that one thinks will actually be paid back. The concern in originating loans if you aren’t going to hold the paper is “Can I sell the new mortgage upstream?”

          BUT it is so true that credit default swaps are still a threat to the global economy. There is still no mandate to reserve capital to pay potential claims. And history has proven that when they go bad, they tend to go bad all at once. Its enough to keep a person up all night.

          • 0 avatar

            > Some could make the case that securitization is the problem.

            All of these money games are just tools akin to how the underlying math is a tool for many fields. Sometimes tools/processes can be dangerous if not used correctly, and if that danger can seep into wider society the solution for various sorts of pollution are well known.

            The crux of the problem isn’t understanding it because that’s simply enough, but the political will to implement the solution.

            > BUT it is so true that credit default swaps are still a threat to the global economy. There is still no mandate to reserve capital to pay potential claims.

            Insurance has been around long enough regulatory methods might as well be templatized. CDSs just happen to have well connected patrons and therefore above the reach of law.

      • 0 avatar

        > Well you got some of this right but missed the big picture.

        > In fact, the entire mortgage bubble and crisis was rooted in credit default swaps.

        Funny when people speaking of the big picture fall so short of it.

        http://www.thetruthaboutcars.com/2014/03/say-hello-to-144-month-financing/#comment-2997321

        Ironically hedging for the systemically risky derivatives underneath with CDS were about their only legitimate use. The whole thing had no chance of working once a bubble started.

        • 0 avatar

          The 144 month car loan isn’t normal. I recently looked into one of these long term loans made by a colleague. It was for an expensive Ferrari with $90K down. The borrower had 800 credit and the loan could have very easily been made as a signature loan, as the borrower had substantial assets.

          The story of the creation of the CDS is fascinating. Google up the store of Blythe Masters who invented them when JP Morgan was concerned about its exposure to EXXON when the Valdez ran aground..

    • 0 avatar
      Scoutdude

      The big difference between sub prime auto loans and the sub prime home loans is that sub prime auto lenders are charging higher, usually much, higher rates to the sub prime borrower while the Credit Default Swaps and the way they packaged sub prime home loans resulted in the rates being charged to the sub prime borrowers not reflecting the appropriate level of risk. There was also the thought that home values would continue to appreciate at their unsustainable rates implying that there was no risk involved since it was assumed that the property would be worth as much or more if foreclosure was required. With automobiles it is assumed that they will depreciate, potentially quicker than they are payed off. So no there is no where near the risk associated with the sub prime auto loans vs what was going on with the sub prime home loans. Sure if there are massive defaults the price of used cars will fall as there are fewer borrowers which will reduce demand which will increase the lenders exposure.

      • 0 avatar

        > rates being charged to the sub prime borrowers not reflecting the appropriate level of risk.

        This eventually came to pass, but the crash wasn’t necessarily due to fraud per se though that made it worse. The bubble inflated pretty well without the final blows from anyone with a pulse or without looking for a loan before they got priced out of the market.

        The whole thing makes the perfect case for strict regulation of the finance sector, but apparently the administration is too busy dealing with the scoff-laws in automotive who didn’t relabel a part or something.

    • 0 avatar

      If you want a REALLY good assessment of what happened, read “All the Devils are Here,” By Bethany McLean and Joe Nocera.

      OR if you want a thumbnail version:

      http://autosandeconomics.blogspot.com/search?q=mortgage+crisis

      Wall Street had been securitizing mortgages for Fannie and Freddie for quite a while when Wall Street figured out they didn’t need F&F any more. Enabled by the credit default swap the were able to “approve” loans themselves. A Fannie or Freddie (GSE) securitization received the coveted AAA rating because the mortgages were ostensibly guaranteed by the full faith and credit of the U.S. Government. Mortgage backed securities NOT guaranteed or owned by F&F received the coveted AAA rating due being insured by the credit default swap. Yes, this is a bit of an oversimplification and doesn’t address the complexity of how the securities were constructed with tranches of various levels of risk, but the bottom line is that without the CDS, the Wall Street securitization doesn’t happen and the F&F system would have continued on with an occasional hiccup, but nothing like what we experienced.

  • avatar
    seth1065

    Fairly simple way to stop this buy what car, house… You can afford with a set rate, will not work of course, now that cars cost more than houses in Detroit make everyone due a budget to see what they can afford

  • avatar
    raresleeper

    As income inequality gap increases, and believe me- it IS increasing, and the middle class is indeed vanishing to boot- there is going to be a greater need for financial companies to cater to the subprime crowd.

    While I understand that the risk is generally much HIGHER to grant loans to these debtors, there will be a need for more companies to step it up and offer these loans.

    We’re going to see an even greater influx of subprime debtors. This business will continue to grow hand over fist. The opportunities here, if executed properly, will be tremendous.

    Do you really see the lower class’s credit scores growing across the board? They’re already suffering from stagnant growth AND equally stagnant wages.

    Low income and poor credit generally go hand-in-hand.

    • 0 avatar

      Income inequality is a NATURAL result of people possessing unequal skills and talents.

      I don’t begrudge LeBron for being taller than me and making a million dollars a week.

      I don’t begrudge Opie or Anthony for having a radio show and being funnier than me.

      The simple fact is that people ARE NOT equal. The US Constitution is there to provide us all equal protection under the law – regardless how much money we have, but those with more money will be able to afford better heatlhcare and services – better cars, houses, etc.

      I see people WASTING MONEY all day long. I’m guilty of it too and try to control my spending habits.

      The government’s crony capitalism is the real problem with the banks. If you INSURE BANKS or promise them bailouts due to them being “too big to fail” – you are giving them a blank check to make mistakes.

      What’s worse is that the government just prints more, taxes more and inflates more – never having to worry about profit and loss statements.

      There are many banks that avoided the sub prime crisis because they refused to write risky loans – only to be forced to consume smaller banks to hide their insolubility.

      • 0 avatar

        > What’s worse is that the government just prints more, taxes more and inflates more – never having to worry about profit and loss statements. There are many banks that avoided the sub prime crisis because they refused to write risky loans – only to be forced to consume smaller banks to hide their insolubility.

        I suggest looking into how the FDIC (or fiat currency, or anything really) actually works before gracing the world with more financial advice.

    • 0 avatar
      Onus

      Sounds about right.

      The us has some of the worst income inequality in the western world. Thats not something to be proud off. Good for the rich, bad for the poor.

      Government policies have far too much to do with the current state of income inequality.

    • 0 avatar
      APaGttH

      If the guy building the new Toyota, can’t buy the new Toyota, eventually the wheels fall off the whole economy.

      Henry Ford had this whacky idea that the guy building the Model T, which was built as an affordable car for the masses, should be able to afford the Model T. And a modest home. And be able to support his family. And work a 40 hour week. And have some leisure time.

      That socialist bastard!

      • 0 avatar

        If everyone had a car, what would greenhouse emissions be then?

      • 0 avatar
        JuniperBug

        Actually, Ford’s then-new assembly line model made for such tedious, repetitive, hard work, that his worker turnover was incredibly high, and having to constantly train new-hires was bad for his bottom line. He raised worker wages so that workers would tolerate the terrible working conditions. He wasn’t nearly as altruistic as you’re painting him to be.

        • 0 avatar
          jkross22

          No, let him keep going! He’s on a roll.

          I was looking forward to hearing how great of an employer he was and how he loved all of his employees (especially the minority ones). I’m sure there were no kids working there and made sure no one got hurt on the job.

          He was a prince.

          • 0 avatar

            From what I know about Henry Ford, had someone explained to him the productivity advantages of worker safety and reducing injuries, he would have made his plants safer. Ford was about productivity.

            Ford wasn’t the first automaker to use an assembly line. Ransom Olds built cars on an assembly line before Ford. Ford’s contribution was braking assembly down to the simplest tasks so that even unskilled labor could do it. It was mindless drudgery, and Ford being a disciple of Taylorism, workers were timed with stopwatches. So it was a terrible job with a high turnover rate as JuniperBug pointed out. Ford had to hire something like 45,000 people in 1913 just to keep 14,000 on the job. So he started paying $5/day (under certain conditions).

            Henry Ford was a weird combination of progressivism and paternalism.

            FWIW, he did hire blacks. Inkster, Michigan was settled by blacks who moved to the Detroit area to work at FoMoCo.

            Speaking of blacks and the auto industry, Charles Hyde’s new book, Arsenal of Democracy, discusses the “dozens” of “hate strikes” called by UAW locals to protest the hiring of blacks in supervisory and skilled positions. As more blacks moved to Detroit to find factory jobs during WWII, racial strife in the plants grew. While the national UAW didn’t approve of those strikes, race was certainly an issue at the local level.

          • 0 avatar

            http://autosandeconomics.blogspot.com/search?q=henry+ford

        • 0 avatar
          Toad

          Juniper, you can’t spoil the narrative with the truth!

          Henry Ford wanted to set a wage that would all but stop employee turnover, and the $5 wage did it. Even if a guy wanted to quit, where else would he make that kind of money for unskilled labor? Henry simply outbid his competitors for assembly line labor.

          Henry was not Upton Sinclair by any measure.

      • 0 avatar

        I don’t buy this at all. Who says everyone should be able to afford a new car. There is nothing wrong with having a beater if you’re broke or a modest second hand car that is 5 years old if you have some money. New cars are a lousy investment and many people never buy one

    • 0 avatar

      > While I understand that the risk is generally much HIGHER to grant loans to these debtors, there will be a need for more companies to step it up and offer these loans.

      No, where people get into trouble with loans is precisely lending money they can’t afford to service; that’s pretty much subprime by definition.

      If there’s ever a need for broad social rules (ie laws), it’s to prevent the greedy from leading the dumb and dragging the rest of society down with them.

  • avatar
    jjster6

    I’ve unbanned myself. Some time ago I was banned for suggesting the German editor-in-chief had sand in his lady parts.

    I understand TTAC has changed their stance on banning people and I followed the email instructions to have myself unbanned. Several times. No response in over a month.

    Therefore I created a new account using a new email address. If necessary, feel free to re-ban me Baruth. However I don’t think you even have lady parts so please welcome me back.

    • 0 avatar
      DeadWeight

      There’s pretty much a no ban policy, and despite this, there have been exceedingly few instances of ad hominem attacks since Bertel was booted as EIC.

      And let us all be honest here; Bertel nearly killed this site for good with his bizarre policies, politics, and overall a$$hole ways (oops, that last part was ad hominem).

    • 0 avatar
      Jack Baruth

      I apologize for the lack of unbanning. We went through and unbanned everyone, even people who didn’t ask. It’s possible your account was just borked.

      Anyway, welcome back.

  • avatar
    CapVandal

    For everyone worried about ‘here we go again’ …..

    ” Fitch, which has issued a negative outlook in the sector as a whole, told SNL that overall, losses were at “historical lows” and that the increase in lenders will make the segment more competitive.

    SNL also reports that Moody’s has cast an eye on underwriting standards”

    The credit rating agencies had their ‘come to Jesus’ moment and are now aggressively suspicious. The buyers are no longer so naive. Anyone that loses a penny on credit with the label ‘subprime’ will be both fired and ridiculed.

    Where did the risk go? To the borrowers in the form of double digit interest rates.

    • 0 avatar
      sunridge place

      ‘Where did the risk go? To the borrowers in the form of double digit interest rates’

      Ding, ding, ding…we have a winner! You can make a ton of $$ at 10%-18% APR(still below BHPH rates) with people considered subprime in the 550-650 credit score range with other criteria somewhat stable. Those customers are also among the most loyal in the business to a lender and a brand. Especially if you’re able to service them as they step back up into near prime to prime.


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