As it pursues government funding and bank holding company status, GMAC LLC is mulling a move to service auto loans for other lenders.
“As you may know, we’ve taken several key steps to our goal of transforming GMAC into a deposit-funded lender and scale servicer with GMAC Bank at the core,” said Chief Financial Officer Robert Hull during the company’s Nov. 5 conference call to discuss third-quarter earnings.
Specifically, “GMAC’s automotive servicing operations have been developed with an eye on providing greater internal servicing efficiencies for other GMAC business units and potentially providing third-party automotive servicing,” company spokesman Michael R. Stoller Jr. told Auto Finance News.
Nonprime lender Triad Financial Corp. has been working to implement a similar structural change this year. Huntington Beach, Calif.-based Triad has been transitioning itself into a third-party servicer since it stopped originating indirect auto loans when its funding dried up in May.
For GMAC, the decision comes amid struggles with credit performance and access to capital. The mega auto and mortgage financier lost $2.5 billion last quarter and has curtailed leasing and restricted certain lending operations. For instance, GMAC made $13.3 billion of auto loans and leases last quarter, putting it on pace to originate about $45 billion for the year, down nearly 30% from $62.5 billion in 2007. The company may have to further suppress originations to preserve capital, Hull said.
Also, GMAC’s losses have been creeping upward since midyear 2007. Annualized credit losses as a percentage of managed retail contracts hit 1.55% last quarter, up from 1.05% at year-end 2007 and 0.92% at midyear 2007. In North America, net losses shot up 71 basis points, to 1.9% from 1.19% in the third quarter of 2007.
And funding has been hard to come by, as well. “Our short-term debt is under pressure, especially unsecured borrowing, such as commercial paper, demand notes, and short-tenor bank loans,” Hull said during the call. “This is a direct result of increased risk aversion in all parts of the credit market, banks, institutional, and retail.”
The securitization markets “are effectively closed,” he added, and “we’ve also seen activity in the asset-backed commercial paper market fall sharply over the past several months.” As a result, GMAC’s asset-backed commercial paper conduit has executed $5 billion in trades in the Federal Reserve’s CP purchase program during the past two weeks, Hull said.
Other notable mentions from the conference call:
• GMAC is shouldering sole responsibility for lease residual risk. “As part of the 2006 sales agreements covering the equity sale of GMAC, various levels of risk-sharing were developed between General Motors Corp. and GMAC covering automotive assets,” Stoller said. “At certain pricing levels, our support of GM translates into GMAC assuming 100% exposure to declining residual values.”
• GMAC discontinued its SmartBuy program on Oct. 1, a decision that was announced July 31. The SmartBuy product, effectively a balloon-finance program, was “concentrated in only a few states,” Stoller said, primarily those with “specific state regulations regarding lease liability.” SmartBuy contracts comprise a “small percentage” of the company’s portfolio, he added. Hull mentioned that the company increased its credit-loss provision by $112 million last quarter, primarily because of residual exposure on the retail balloon portfolio.
• GMAC’s retail penetration fell to 14% in October, from 19% in September.
• Credit reserves on the commercial portfolio more than doubled to $96 million, from $44 million in the second quarter and $37 million in 3Q07.
• Unlike historically, GMAC did not allow time for a question-and-answer period at the end of the Nov. 5 earnings call. “You’ll hear in our discussion today we’re working on a number of important transformative initiatives,” said Susan Shank, director of investor relations, at the start of the call. “Since we don’t yet know that these initiatives will succeed, we’re limiting what we can say about our outlook and about these efforts.” Hopefully the company will reinstate the Q&A session “in future calls,” she added.
—Marcie Belles