And here it goes again - an automotive bubble
I had already posted about the sad state of financial affairs at General Motors (recently,
here and
here)
Now it seems they are doing 'funny stuff' with their lending.
From
Investors Business Daily:
GM Ramps Up Risky Subprime Auto Loans To Drive Sales
President Obama has touted General Motors (GM) as a successful example of his administration's policies. Yet GM's recovery is built, at least in part, on the increasing use of subprime loans.
The Obama administration in 2009 bailed out GM to the tune of $50 billion as it went into a managed bankruptcy.
Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM's growth.
The automaker is relying increasingly on subprime loans, 10-Q financial reports shows.
Potential borrowers of car loans are rated on FICO scores that range from 300 to 850. Anything under 660 is generally deemed subprime.
And the numbers:
The worse the FICO score, the bigger the increase. From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores � below 540 � shot up 79% to more than $2.3 billion. The second worst category, 540-599, rose 28% from about $3.4 billion to $4.3 billion.
Prime loans, those above 660, dropped 42% to $676 million.
GM Financial provides just over 8% of GM's financing. Prior to 2006, GM's captive lending arm was GMAC, but GM sold a controlling stake in 2006. GMAC later renamed itself Ally Financial and continues to provide the bulk of GM's financing.
In less than two years, they are writing 79% more loans to people with FICO scores of less than 540 -- this is what blew up in our faces four years ago with the housing bubble. Do these people never learn? The $40K car they write paper for will be worth at the very best only $30K when the buyer defaults -- how are they going to recover their money then?
A perfect example of the efficacy of Government Meddling in what they do not understand.
Posted by DaveH at July 27, 2012 7:50 PM