By on October 13, 2008

Regular readers of this site will know that America’s domestic automakers and their captive finance units are not on speaking terms with the truth. The estrangement continues with news that GMAC (a GM – Chrysler co-production) is tightening-up its lending practices. GMAC spins the announcement as some kind of reflection on their sense of fiduciary responsibility: “GMAC Financial Services today implemented a more conservative purchase policy for consumer auto financing in the U.S. as a result of the lack of stability in the global capital and credit markets. The changes include limiting purchases to contracts with a credit score of 700 or above. Additionally, the company will restrict contracts with higher advance rates and longer terms.” As Automotive News [sub] points out, this is hardly an onerous “limitation.” “For the first seven months of 2008, prime customers with scores exceeding 700 represented 74.3 percent of the U.S. auto loan market.” But the real story is the story behind the story.

The FICO score story neglects to mention two key facts. First, the “lack of stability… in the markets” is the usual smoke and mirrors. Translation: the banks to which GMAC sells whole loans don’t want high risk consumer paper. If any. Second, somone forgot to tell you that GMAC is no longer writing loans over invoice. In other words, backwards customers– and that’s just about everyone– can’t roll the loss on their last vehicle into the cost of the new one. Meanwhile, GMAC’s “platinum bonus”– thousands of dollars paid to dealers who booked a large number of GMAC loans– is dead. Connect the dots. Now that GMAC’s ability to lease is gone, killed by falling residuals, the lender is, in effect, closing down its auto loan biz. This at the exact moment that Toyota is unleashing its zero percent sale. The dominoes they are a rockin’.

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10 Comments on “GMAC “Tightens” Lending Policy; Domestics’ Car Loan Cash Drying-Up...”


  • avatar
    John Horner

    In recent times, most auto loans ended up being securitized and sold in packages to investors. The market for those bonds has gotten very tight, especially for anything less than stellar credit risks.

    The problem isn’t as much the banks being unwilling to lend, though they are, but that banks have gotten largely out of the business of making loans and carrying the loans on their own books. They have been bundling everything into bonds and selling those off to the next guy. Now, hardly anyone wants those bonds anymore. But, when the whole market seized up things went to crap.

    Now, people who are actually in a good position to buy a new car can still get financed, but those who really shouldn’t be spending that kind of money … can’t! Substantial down payments of either cash or a trade-in which still has some real value are required. It is 1980 all over again in the consumer debt game. Back then a typical new car loan was for three years. At the end of three years the owner had some significant residual equity in the car, usually enough to take care of the down payment on a new one.

    All in all, this new reality is a good thing, but the transition hitting all at once is damn painful. Whole industries were based on the ponzi scheme of consumers getting deeper and deeper into debts they really couldn’t afford to pay off.

    Ding, time’s up!

  • avatar
    truthbetold37

    Oh f***!

  • avatar
    yankinwaoz

    the lender is, in effect, closing down its auto loan biz

    No. The lender is putting a stop to suicidal underwriting practices and attempting to refocus the business only on prudent and conservative traditional auto loans.

    About time too. GM milked that fundamentally flawed revenue source too long.

  • avatar
    Canucknucklehead

    This is all a bit odd for us here in Soviet Canuckistan. Here in Commie Land, a lender cannot sell your loan. The lender lends money and the debtor pays it. The amount of the asset is the value of the chattel mortgage less depreciation less the amount paid on the loan. The loan as an asset goes down every month as it is paid off, too. Thus, financial institutions make their bread and butter from lending to customers who actually make their payments since they can’t trade paper to each other based on projected future value. For this reason it is also practically impossible to get a loan without a steady employment record, good credit and at least 10% down to cover the drive off write down. I know, this kind of lending must sound pretty Bohshevistic for our neighbours in the south but it kind of ensures the default rate is pretty low. The home lending rules are exactly the same, too. Sure, it is communism to to only lend to people who will repay but we have to live with it.

    When I first heard of the loan bundling thing that was going on in the USA, I simply couldn’t believe it. A friend of mine was selling cars in Georgia at a Chevy store. I went to visit him a couple of years ago and I was shocked to see scads of people named Billy-Bob going in and getting loans. Some of these loans were at 15% or more, often with sub-prime teasers. When I asked my friend what the default rate was, he said, “Hey, my business manager does the financing and I get paid, so I don’t care.” He then explained to me that GMAC bundled the loans and sold them anyway.

    When I heard that was going on, I knew the USA was in deep crap. Such things are unheard of here in Soviet Canuckistan.

  • avatar
    John Horner

    Canuckistan has got it right!

  • avatar
    Canucknucklehead

    Horner, we are just a bunch of impoverished Moose Herders. We don’t get car loans cuz we don’t drive cars; we use dog sleds.

    Ain’t nuttin’ yous can learn frum us Pinkos. You betcha!

  • avatar
    Ken Elias

    GMAC has a deal with Citi and Bank of Nova Scotia where these two banks purchase whole loans. I’m sure these banks have considerably less appetite for loans in recent weeks, and aren’t willing to look at anything besides prime paper.

    The securities markets are very tight, and looking at ABS paper backed by GM and Chrysler vehicles ain’t too reassuring these days, especially given that a bankruptcy of either or both companies would wipe out a good chunk of value in the underlying collateral – vehicles.

    Whatever the reason, financing options on new domestic cars are getting tight and financing affordability is going down. This just adds more tension for vehicle buyers and lowers sales.

  • avatar
    928sport

    What a great idea! one most have good Credit to buy something!

  • avatar
    Landcrusher

    Canuck,

    That’s not bolshevism, it’s conservative banking. Under Bolshevism party members get 0% interest, and othere don’t. Also, party members get a car, while others wait in line.

    But anyway, the reason bundling is a bad idea is the way they do it. They strip a lot of information out, and (at least in mortgage bundles) they even make it impossible to strip anything out of the bundle.

    This is stupid. Why? Because if you can’t sell an individual loan out of the bundle, then each loan becomes worthless. The whole loses the value of the sum of it’s parts.

    I suspect that future bundling will be easier to unwind because that kind of bundle will retain a higher value. The other kind are going to be junk until everyone forgets this lesson.

  • avatar
    ronin

    I don’t see how banks and ‘acceptance corporations’ could stop lending. Lending is how they make their money.

    What I can see is returning to loan approval standards of way way long ago- way back to those of the 90s and 80s.

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