The debate over Detroit’s bailout was dominated by a narrative that portrayed the automakers as victims of Wall Street excess, and placed blame for their collapse on the frozen credit market. And though the credit crunch certainly hurt GM and Chrysler as well as their customers, Detroit was a victim of the credit crunch in the same way an addict is a victim of his dealer. By leveraging easy credit to fuel the SUV boom which covered for unprofitability in passenger cars (or didn’t, as the case may be), Detroit binged on zero-percent financing as the market road confidently to 16m annual sales. And then, finally, the music stopped and the Domestics crumpled, victims of their own greed, but with a convenient scapegoat in the hated Wall Street bankers. But if the bailout was intended to not only get GM and Chrysler back on their feet but also to prevent future collapses, there’s some troubling news in the offing: subprime auto lending is starting to roar back, and if it goes unchecked, it could reach pre-recession levels in short order…
The AP reports on the latest results from Experian’s survey of the credit market,which finds that
The percentage of loans going to subprime buyers rose 8 percent in the third quarter, their first year-over-year increase since 2007, according to a report issued Tuesday by Experian, a credit reporting agency. For new cars, the percentage of loans going to subprime buyers rose 13 percent over the July-September period in 2009. The increase for used cars was 3 percent.
The majority of loans — 63 percent — still going to buyers with prime credit scores, which is defined as a 680 or above. But even that is settling into a more normal pattern. Before the recession, when credit was very loose, just 51 percent of loans were going to prime buyers, according to Melinda Zabritski, director of automotive credit at Experian. Last fall, when credit was tight, 66 percent of loans went to prime buyers.
Another sign that the credit market is thawing: The loans people are getting are covering larger amounts and have longer terms. The average amount financed for new cars rose $2,530, to $25,273, over the third quarter of last year, while the average amount financed for used cars grew $977 to $16,706. The average terms rose by about a month, although the lowest tier buyers — those with scores of 550 or less — saw their terms rise by nearly four months.
Obviously more-available credit is a good thing for companies selling some of the most expensive consumer goods on the market, but an eight percent jump in subprime lending rates, an increase in debt loads and longer loan terms are hardly encouraging in a macroeconomic environment that calls for consumers to de-leverage after a decades-long credit binge. On the plus side, delinquencies have fallen, with 30-day delinquent loans down eight percent and 60-day delinquent loans down 17 percent. Still, thanks to the convenience of its Wall Street scapegoat, the auto industry hasn’t been forced to confront its credit addiction issues, and GM’s rapid purchase of subprime lender Americredit shows that its still eager to cash in on risky finance. The industry needs to watch subprime lending rates carefully or risk collapsing once more if the credit market runs into trouble again.
I wonder how the recession and the collapse of the real estate bubble is impacting credit scoring. Someone who had to do a short sale because of a job relocation will have have severely impaired credit but still be a decent credit risk.
Exactly. There are millions of people in the USA who’s only credit blemish is a mortgage gone awry. For *any* company to continue doing business in the USA they are going to have to take this into consideration. A magic credit score does not tell the whole picture. I know of people with 800 credit scores who in a short sale process ended up with 9 months of a non-payment scenario on a mortgage which was finally resolved but dropped their magic credit score to 500ish, even though there is not a single other issue.
It makes me wonder if the magic credit score vendors in their smoke and mirrors calculations will start to reduce the weighting of mortgage things, or in some way start to mitigate this problem.
It makes me wonder if the magic credit score vendors in their smoke and mirrors calculations will start to reduce the weighting of mortgage things, or in some way start to mitigate this problem.
Wait until they have to start doing it to entire countries.
A heads up on sub-prime auto loans. Rather than being a 0% interest binge, sub-primers are made all the way up to 21% APR.
If it is a new vehicle being financed, a sub-primer is where most the profit is. So, no doubt GM would buy a finance unit.
Folks with good credit scores should be good for a 2.9% or less.
To say that because we’ve moved from 66% prime to 63% prime that “we could reach pre-recession levels in short order” is just a tad bit alarmist. Every indication is that 51% prime was way too loose and 66% prime was way too tight. Just because it is moving towards some middle ground doesn’t mean we are headed back to 51% prime.
Separately, I’d love to see some numbers about the change in distribution of credit scores due to the depression. My guess is that there have been quite a few people that have moved from 700+ down into the 600s. Even the set of people that make up the “subprime” category has changed completely.
I know I’m short sighted, but I’d rather see this than sub-prime mortgage loans…
Yeah, what could possibly go wrong? :)
Longer terms? Rule #1 of financing a new car still applies: never get a new car loan that is longer than the manufacturer’s warranty.
Top four subprime auto lenders in the U.S. according to Experian: Wachovia, Capital One, Toyota Financial Services, Chase Auto.
“On the plus side, delinquencies have fallen, with 30-day delinquent loans down eight percent and 60-day delinquent loans down 17 percent.”
I doubt this is the positive it appears to be. What has fallen is delinquent loan balances – and only because these have been written off. This is therefore a sign of weakness, not of strength. It’s a close parallel of the credit card business, where declining outstanding balances are touted as a sign that Americans are wisely learning to sidestep their spendthrift habits of the last decade. Actually, credit card $ are dropping mainly because companies are cancelling cards and writing off the amounts owed as uncollectable.
In a nutshell, this is happening because we are less credit-worthy, which is the case partly because we are in a depression. My view is that carmakers are recognizing this by coming out with new, premium small cars like the Fiesta. We are becoming a nation that can’t afford anything better, and – like Japan – we are headed into a decades-long national impoverishment. The propaganda spewed to conceal the nature of this historic trend while spinning its artifacts as positives will rival the crap written about how Washington pulled us out of the Dirty Thirties.
The debate over Detroit’s bailout was dominated by a narrative that portrayed the automakers as victims of Wall Street excess, and placed blame for their collapse on the frozen credit market.
Not true. The issue was always about the inability of the auto companies to get financing, especially DIP financing, when the financial markets were frozen. Rattner, for example, never discounted GM’s and Chrysler’s managerial shortcomings, but he fully understood the consequences of frozen financial markets.
This is from Rattner’s TNR interview:
But late 2008 and early 2009, private capital markets were frozen, so there was no private capital available to finance GM in a bankruptcy. And without DIP financing, GM would have simply run out of money, closed its doors, and filed a bankruptcy petition that quickly turned into a liquidation. It would have put out of work all of its people, all of its dealers and employees—or most of them—along with many of its supplier jobs. It would have rippled through the auto sector and it’s quite possible, if not likely, that Ford and Chrysler would have been forced to shut down, too, because of the supplier problems.
+1. Million for this line: The issue was always about the inability of the auto companies to get financing, especially DIP financing, when the financial markets were frozen
People who talk about the illegal bankruptcy process that saw the company “stolen” seem to forget that, quite frankly, there was no one willing, or at least no money available to anyone willing, to buy those assets. The “screwed bondholders” would have gotten fractions of pennies if they were lucky because GM had lots of debt, no cash and buyers lined up none-deep for it’s assets.
“And then, finally, the music stopped and the Domestics crumpled, victims of their own greed, but with a convenient scapegoat in the hated Wall Street bankers.”
What?
No one, but no one is talking about the hated Wall Street bankers. When people talk about the “bailout” they refer to the Wall Street banks in a second hand manner if at all, but the lazy UAW – they’re the real crooks…