It’s back to the past for GMAC LLC, as the finance company resumes making subprime loans.
GMAC Financial Services said it will resume making car and truck loans to subprime borrowers and will lower inventory financing costs for cash-strapped auto dealers, part of a series of moves intended to spur sales at General Motors Corp.
The moves announced Wednesday come as the embattled automaker races to restructure and get customers back into its showrooms amid growing risk that it will be pushed into bankruptcy by the Obama administration.
GM, whose U.S. sales plunged 51 percent in the first two months of this year, also began rolling out a program that will cover some payments for customers who lose their jobs after buying a car, an incentive intended to bring back shoppers worried about job security amid the recession.
GMAC, which provides financing to many GM vehicle buyers, said it would make at least $5 billion of credit available to customers over the next 60 days, a period during which GM has to prove to U.S. officials it can win sweeping concessions from bondholders and its major union.
The finance company plans to resume accepting finance applications from car and truck buyers who have credit scores below 620, a line dividing prime borrowers from less creditworthy subprime borrowers. The median U.S. credit score is 723, according to Fair Isaac Corp’s myFICO unit.
At least the margins will be richer than the last time it was doing subprime. Analysis here.
No problem for GM, just for the US taxpayers. Actually, indirect auto is more about the value of the collateral. Prime borrowers are concerned with the cost of the vehicle and cost of money (even when hidden under subvention). Subprime borrowers just want a vehicle at a low mothly payment. The part unstated is the amount of down payment and length of term that will be required to turn a low score score into a reasnable risk. Perhaps GMAC should make two loans -one for the down payment and one for the prudent financing of the vehicle so that we have a better picture of what is happening. I think this is called “transparency” for us simple-minded folk.
Because it will take 2-24 months for the sub-prime loans to go bad, they are buying time to get car sales volume up. In many businesses, increased volume cures many ills. But real profits cure all ills.
I hope that Samuel Ramsey, Chief Risk Officer and a director of GMAC does not have a golden parachute and that all of his 401k is invested in GM stock. If he is not in favor of this, he should resign (reminder: we have not heard the terms of credit to the sub-prime borrower so it may not be stupid terms as my comments could imply). The other directors mostly represent the other 51% owners – Cerberus, Citibank, Morgan Stanley – Hmmmm where have I heard about those financial leaders before?
I wish them well. Desperate times result in desperate actions.
If this does not work, can taxpayers funding this get a preferred deal on the repos?
Will the interet rates on the sub-prime segment be confined to a small increment over what is being offered to prime borrowers or is GMAC going to gouge the sub-prime group? Are they going to limit dealer participation to 50bp and pay it on an as earned basis to make sure that everyone has some skin in the game?