When the news came across the e-transom last night that Cerberus’ chairman John Snow’s pals at the U.S. Treasury had decided to “invest” $5b in GMAC, my blog was filled with words like “bat shit crazy” and “disgusted.” After the shock wore off, I edited the post to remove my angry jibes and let the nonsensical nature of the move speak for itself. And respect the views of those who feel that pissing away $6b (an extra $1b for GM) is in the national interest, free market principles be damned. And anyway, I figured this is only the tip of the insanity iceberg. It didn’t take long to get a look below the waterline. Marketwatch (can someone lend their logo a sweater?) reports that the plucked-from-bankruptcy lender is lowering its lending criteria, from a FICO score of 700 to 621. “The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers,” said President Bill Muir in a statement. “We will continue to employ responsible credit standards, but will be able to relax the constraints we put in place a few months ago due to the credit crisis.” Need I say more? Oh, one thing: we still don’t know whether or not GMAC met its debt-for-equity target. I wonder why…
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I sit here with a credit score over 800, but don’t get your hopes up GM or Chrysler: my shadow will NEVER darken the door of one of your showrooms ever again. My taxes should have been used for building roads, national defense, social programs for the less fortunate, etc. not to prop up a failed business model captained by egomaniacs who treat their customers with complete disdain. Welcome to your future. I hope you enjoy the stay.
Instead of using a customer’s FICO score, why don’t they just grab the customer’s wrist? If they feel a pulse, they get the loan. Come on, a 621?
The problem with lowering lending standards is it will increase defaults (just as it did in the mortgage industry), which companies pass on those costs to their “more fortunate” customers (i.e. the ones that are responsible and pay their bills on time). But that is our society today. (sigh)
Toyota and friends must be laughing their asses off.
Let me explain; if you’re a string vested bum and you can make FICO 621 to get that Silverado, and then in two years you default, GMAC have to fire-sale it cheap to recover just a few dimes on the original contract. With GMAC’s help you’ve just knocked down the resale of every other Silverado customer!
Lower credit standards = higher chance of default = cheap repossession vehicles in circulation = ever lower resale values.
Now I think I finally understand why Toyota are “happy” for GM to survive. It’s not about the suppliers, they know they can negotiate a solution and provide the $$$ to keep suppliers they need going. They want GM to attract the defaulters and keep the downward pressure on resale values for GM product.
Everyone else gets to keep a healthy repeat business model going.
I think that this tells you that the auto industry is propped up by buyers with poor credit, and that GM in particular is dependent upon the lower tier buyers for their business.
This is also an indication of things to come, not just for GMAC or the auto industry, but for the entire lending market. If these lenders are going to make the big bucks again, they are going to have to return to having lower standards.
Now I think I finally understand why Toyota are “happy” for GM to survive. It’s not about the suppliers, they know they can negotiate a solution and provide the $$$ to keep suppliers they need going. They want GM to attract the defaulters and keep the downward pressure on resale values for GM product.
I can’t agree. I believe that for Toyota, in addition to the supplier problem and possible political backlash, it’s largely because they would prefer to have inferior competition. It’s easier for Toyota to accentuate its quality message when the comparisons to Chrysler and GM are possible.
If GM and Chrysler disappeared, the US government would have more reasons to change some rules in order to open up the market to new entrants who could fill the gap. That would pave the way for Ford to recover nicely, the Chinese to open up the floodgates, Hyundai to dramatically increase production, and possibly some of the Europeans to come in to fill the niches.
Toyota has no desire to see any of that. Those adversaries will be much tougher to beat. Doing battle with GM is child’s play, with management so incompetent that they pose no real challenge.
I believe a credit score of 621 is still considered “Good”. These folks represent a large segment of the car buying public. If you think Toyota and/or Honda is turning away a 621, think again. If memory serves an “excellent” credit score starts in the mid 700s depending on which source you use.
Simply put, everyone fits into financing somewhere. Those with a score in the 600s will probably not be eligible for the best financing offers, but their terms will instead reflect the credit risk they pose. Higher interest rate, larger downpayment, etc.
Personally I am glad to see TARP money being used as intended.
I have a relative that loves Chevy pickups and declared bankruptcy a few years ago, so GM can look forward to making lots of risky loans to people like him. Hmmm, aren’t risky housing and car loans what got us in the current mess to begin with?
I think this is going to go really well. I don’t see how it could pose a problem for anyone.
Airhen:
Lending to crappy (bad credit) borrowers has no effect on good (high credit) borrowers. If GMAC tries to make up its losses on bad borrowers by hitting good borrowers then the good borrowers will just go to one of the many other options (credit unions, banks, etc.) that they, as good borrowers, have.
The cost of the government subsidizing sloppy lenders in not borne by other borrowers, but by taxpayers, taxpayers’ children, and taxpayers’ children’s children. For example, when GMAC’s future loans go bad and they cry Uncle Sam for $5 billion more.
Lower credit standards = higher chance of default = cheap repossession vehicles in circulation = ever lower resale values.
In other words, restart the cycle that has pummelled resale (and ‘new’ sale) values over the past year. Hopefully they will show more sense this time because last time the people getting car loans was just ridiculous.
I don’t mind people with so so credit being put in a new car just don’t sell them a big house. To me this unfortunately is why the working poor stay poor. Better to get the used car or not get a car at all until you can save some money improve your credit score etc then to buy a car. I plan on driving my Xb currently with 70,000 miles until i hit at least 200,000 miles. At least thats the plan.
Nations on car and house welfare, paid for by their children, who will toil in 3rd world factories making goods for the Chinese, and live in a dirt floor shack!
Really though, what kind of future are our children and grandchildren going to have because of this? If we want to pay this off, do we have to picture a future where inflation has devalued the currency somewhat, where the government lives well below their means, and collects a boatload of taxes from people who make goods we can sell to other countries? Can a service based economy ever pay off debt owed to foreign banks? Who is covering all this new money anyway?
It’s fairly mind boggling to me, I should hit the finance geek boards I guess.
Do people really factor in their Credit Scores when making a purchase decision? I’m not so sure….
For many buyers it all comes down to rolling over a negative balance from the previous car – via trade-in, and what will the monthly payments total.
I wonder if GMAC will go back to financing 120-130% of purchase prices. That, combined with riskier credit lending policies might just turn into a real mess in a few years. Talk about toxic car loans.
Yahoo! Now more people- the ones who did not make the cut last time- get to go upside down on their car loans! Get to go deeper in debt!
Nothing like looking at the house on fire and throwing on more gasoline! Yayy for our gov and our banks!
Won’t they even be more surprised when there are few takers. Because they cannot force people to borrow. And people are not in a mood to borrow.
So watch as the onrush fails to develop, so they lower the qualifying credit score… and then do it again… and again… and again.
And why not? There are no consequences! Last time there was a risk that GMAC would have to eat bad loans. Now it’s just the US Taxpayer! Yayy for us!
Can a service based economy ever pay off debt owed to foreign banks?
No.
I am not an economist. But I’ve had that same gut feel about the economy ever since politicians and other duplicitous types started peddling this ‘service-economy’ crap as a way to allay people’s fears about the disappearance of manufacturing.
Here in Canada, to get a GM loan for a new vehicle and to save thousands of dollars,one has to take there Financing at the current rate of 8.9 percent, one of the groups here says that if you wish to buy a GM product then only keep it for two months and then pay off the Loan at 8.9 percent and arrange another loan, say from a Credit Union at a lower rate or pay Cash for same, maybe an interesting idea but then you would want to buy a GM vehicle in the first place, last week in the Toronto, Ontario press a GM customer who had purchased at new Impala had a small problem with one of the doors, ie the handle broke off, the Dealer said not to worry, as you have a long warranty! so the problem of imperfections in GM vehicles continues eh!
Have a look at this page on interpreting FICO scores:
https://www.wellsfargo.com/credit_center/credit_status/understand/interpreting
Lower the limit from 700 to 621 is a big change.
Politician: Oh my god, we are in a financial crisis.
Non-Idiot: What happened.
Politician: Well, as it has been explained to me, a lack of government regulation allowed lending standards to become incredibly loose. People that should have never gotten loans were given loans. Those loose lending practices were covered up by Ratings Agencies with conflicts of interest, but eventually the the people that were given irresponsible loans become unable to pay on a massive scale, and the lending house of cards fell apart.
Non-Idiot: Sounds complex, how do you keep all of that straight?
Politician: My assistant made me note cards.
Non-Idiot: So, any ideas on how to solve this mess?
Politician: Of course. The problem is that, now that the Ratings Agencies are properly rating debt, banks aren’t buying bad debt anymore. But if banks don’t buy bad debt then people will, as it was explained to me, have to “live within their means”, and that sounds awfully politically unpopular. However, with the help of very intelligent lobbyists from the financial industry we have developed a brilliant solution.
Non-Idiot: Well?
Politician: We, well actually you, are going give billions to banks to loosen lending standards so that people that should not get loans can still get loans.
Non-Idiot: Interesting. What was it that JFK said about someone being able to trade their life for a politicians?
To John Horner and others: Fair Isaac (FICO) who developed the credit score most commonly used in the US rates scores above 620 as “good” credit risks.
Hence the 621 floor on lending is not anything to be appalled over. It is in fact based on responsible lending principles. And as I said earlier, the terms will reflect the risk. A 621 isnt going to get the same terms of a 750 or higher.
I cannot believe you guys think Toyota and Honda are turning away people in this range. Lay off the Kool Aide, for everyone’s sake.
John Horner:
Interesting, so even with 700 FICO requirement GMAC was still able to lend to 58% of the entire US population.
And, according to Automotive News, of all sources, 74.3 percent of the U.S. auto loan market has FICO scores above 700*. But I guess that’s not good enough for GM. Or possibly GM is not good enough for that 74.3 percent of the automotive loan market.
* https://www.thetruthaboutcars.com/gmac-tightens-lending-policy-domestics-car-loan-cash-drying-up/
This is good timing. There was a real chance that to sell overpriced cars and therefore reduce the glut, automakers were going to have to reduce the actual prices (not offer fake promotions) to meet th e market.
Now that the gov has artificially propped up prices higher than the market can bear, we are guaranteed an even greater glut. Because people ain’t in a buying mood, or even a borrowing mood.
Not only will carmakers no longer have to rollback their price increases (and more) of the last few years, increased because of ‘higher raw material costs,’ but they can feel free to raise their prices even more.
In fact, failure to sell cars equals success, because it shows they are more deserving of taxpayer money. Therefore, carmakers WILL increase prices come January in an effort to sell even fewer cars, in order to demonstrate their victimhood and hence deservability.
Here you go guys. Toyota’s 0% financing was offered to anyone with at least a 650 FICO score. Stands to reason that they would finance people below even that number but not at 0%. But, I guess if you are talking about domestics, it becomes poor lending practices.
People really need to try and think for themselves instead of jumping on the “I hate domestics” bandwagon for a change.
http://www.msnbc.msn.com/id/27013926/
Will GMAC go back to financing existing debt on trade-ins rolled up into the new car loan?
Lot’s of Gov’t guaranteed loans with + 130% LTV makes me very uncomfortable….
gamper:
Toyota and Honda have solvent, well rated, financing arms, so they must be doing something right.
GMAC’s bonds are rated as junk, and GMAC is bankrupt, so they cannot be trusted to determine what a good credit risk is.
When it was Cerberus that had money on the line the FICO requirement was a 700, but now that GMAC is playing with government money the requirement has dropped to 621.
When I worked in finance I saw people with past bankruptcies and delinquent accounts with FICOs well into the 600s.
Toyota can do what they want, they are not begging for money from any government. Responsible lenders look at things other than FICO, like the financing of previous large purchases, timely payments on current installment debt, and debt to income ratio, which Toyota is likely doing. As its bankruptcy (but for the grace of bailout money) establishes, GMAC is not a responsible lender.
And, just to correct you, it is the “I don’t want my tax money wasted on the failed Detroit automakers” bandwagon, not the “I hate domestics” bandwagon.
The Wells Fargo chart is slightly misleading, in that most of us have three FICO scores, not just one. There are three credit bureaus in the US, and each of them issues its own score. They don’t all produce the same score. It is possible for one person to have different scores in a couple of tiers, and not just one.
Also, credit scores are falling. As credit tightens, credit lines are being cut, including for borrowers who do make their payments. (A common scenario is for those who had home equity lines of credit who have had them cut because the value of their home has fallen.) A cut in your credit line is going to lower your FICO, even though you haven’t changed your behavior. So there aren’t going to be as many prime borrowers as there used to be.
Until the credit crunch, the cutoff for car loans was somewhere in the mid-500’s. So even going to 620 or 650 is going to exclude some buyers from the market who used to qualify. Combine that with people who had good FICO’s whose scores are falling, and you end up with fewer cars sold, often with higher interest rates.
Great discussion but a couple of things to add.
-People with 700+ FICO scores do not buy Chevy products. To get a good FICO score requires a fair amount of grey matter. Using said grey matter would lead said high FICO holder to come to the conclusion that GM products are crap and not buy one. It also takes many years to get a high score and there is a good chance that person has, like me, been burned by GM junk and poor service.
-People are not realising GM’s reason to exist, or most of the big US super-corporations for that matter. The reason they exist is to pay their executives huge remuneration. Is Wagoner getting paid in stock? HAHA! He is getting that good olde fashioned cash that GM says it doesn’t have any of. It is kind of like Amway; without a product, Lutz and Wagoner could not justify their outrageous salaries, being paid by the taxpayer. Welfare for the ultra-wealthy!
-What about GM’s stock? Well, most of it is owned by “Investment Banks (HAHAHAHA!)” whose reason to exist is to pay its executives outrageous salaries which are also being paid from the public kitty. Now, if I had GM stock myself I would be at the Annual General Meeting demanding Lutz and Wagoner be sent to Alaska. But is this happening? Heck, no! They are doing exactly what they are supposed to: creating huge bonuses for the CEOs of super-corporations.
America is in deep do-do when things reach this level of unbelievable corruption.
I have a 790+ credit score and just bought a Saturn. Then again, I paid cash…
Fraudulent check kiting:
http://finance.yahoo.com/tech-ticker/article/151802/Treasury-GMAC-Bailout-a-Fraudulent-%22Kiting%22-Scheme%3F
and lost negotiation ability with GM:
http://seekingalpha.com/article/112647-gmac-the-fed-and-moral-hazard?source=yahoo
GMAC logic: When you’re in a hole, keep digging. Someone will eventually bail us out.
To the D3 apologists: since you all are so passionate about saving failed businesses, I wonder if you would cover my family’s portion of the tax I’ll have to pay for this. I’ll include my 20 month old’s portion as well, as he’ll likely be paying off this debt you are so supportive of throwing on his shoulders.
A class in Economics, even Home Ec, might help you understand that you can’t spend more than you take in forever.
Well, in Bush’s America you CAN spend more than you bring in; you simply print more money and dole it out to your corporate buddies in the taxpayer’s dime. Then you call it “patriotism.”
And these same corporate executives complain about taxes and welfare for poor people yet they love corporate welfare in the form of the bailout and tax incentives from local governments…
So as this ship is sinking I only have to
say “May God have mercy on our souls…”
Giving loans to credit risks is not how we got into this mess.
We got into this mess by following an economic model that substituted asset inflation for true gross national product growth, while at the same time removing regulation and oversight.
dzwax:
That’s what giving loans to credit risks does, it substitutes asset inflation for true national product growth.
Since there was no true national product growth the Detroit automakers had to use bad loans to continue their sales growth. Now they expect the government to continue making bad loans for them, instead of letting their sales return to reality.
@ Pch101
Doing battle with GM is child’s play, with management is so incompetent that they pose no real challenge.
I agree absolutely. I have posted something similar previous as to why Toyota would like GM around, but your post captured it nicely.
@ gamper
Toyota’s 0% financing was offered to anyone with at least a 650 FICO score. Stands to reason that they would finance people below even that number but not at 0%. But, I guess if you are talking about domestics, it becomes poor lending practices.
A FICO 650 @ 0% on a Toyota product with good (or better than the rest) resale seems like a completely different transaction to 621 at even 8% on a Bigish3 product with bad (or worse than the rest) resale no?
So yes, it is poor lending practice because there is a “worse” asset to back it.