Reversing the Subprime Bum Rap

For all the commentary out there questioning GM’s return to the subprime business, I take an opposite view.

I think the acquisition of AmeriCredit could bolster the auto finance industry’s place in the financial services market. In a sense, this might be just the move that will confirm that auto finance — even subprime auto finance — is a far cry from the exotic mortgages that set off the financial meltdown.

Admittedly, subprime auto lenders got caught up in some loosey-goosey underwriting habits a few years back. LTVs were out of hand, down payments were negligible, and loan terms were extending far beyond the norm. But through it all, auto loans have performed relatively well.

First-time defaults on auto loans dropped 18 basis points to 1.76 in May, according to an index compiled by rating agency Standard & Poor’s and credit information company Experian. The decline came on the heels of a 41 basis point drop in April.

The S&P/Experian Auto Default Index is based on a random sample of 5% of Experian’s database — about 14 million records. The index peaked at 2.75 in February 2009, but has averaged 1.92 since 2004. To put that in perspective, the April reading of 1.76 was 16 basis points below the six-year average.

By comparison, in the mortgage and bankcard sectors, first-time defaults are still tracking higher than average. The S&P/Experian Mortgage Default Index hit 3.45 in May, compared with a 2.46 average since 2004; the Bankcard Default Index hit 8.88, compared with an average of 5.54.

With tighter underwriting practices across the board, the industry has returned to more solid footing. Delinquencies and chargeoffs should continue to shrink, at least for the near term. And a deal like GM’s should help restore the tarnished image of auto lenders nationwide.