Editorial: Redlining the Domestics
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.
Landcrusher on Nov 23, 2008
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.
KixStart on Nov 23, 2008
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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