The Lending Lunacy Continues as GMAC Gives Out More Bad Loans 21 comments
-
Font Size:
-
Print
- TweetThis
This past week the Treasury used $5 billion of funds from the Troubled Asset Relief Program (TARP) to purchase senior preferred equity in GMAC, the financing arm of General Motors (GM). GMAC reacted immediately to deploy the funds by lending to new car buyers with credit scores as low as 621.
According to GMAC President Bill Muir, "We got the TARP money yesterday and today we're out in the marketplace offering it to consumers".
AutoNation (AN) Chief Operating Officer Michael Maroone was equally elated, noting that "We want to get out there and let people know that we can get them credit now. There are plenty of people with credit scores in the 600's who want to buy cars".
GMAC was masterful in showing its appreciation for taxpayer dollars by its quick lending, thus avoiding the criticism the banks received for not lending out their TARP funds. The Treasury will, no doubt, show its appreciation by supplying GMAC with billions more as soon as possible.
The Treasury should reflect on the following points before advancing GMAC additional funds.
- A credit score in the low 600's is sub prime. You earn such a score by paying late and taking on obligations in excess of your ability to repay. A low 600 credit score reflects a financially stressed consumer, typically with little in the way of savings and in need of constant new credit to pay off old credit. Any consumer in this category should think twice about buying an expensive new car. What they should really be doing is trying to save some money, pay down some debt and visit the used car lot.
- The free market was not providing car loans to sub prime borrowers for the reasons listed above. The TARP fund is essentially subsidizing car loans, at taxpayer expense, so that customers who couldn't buy a new car based on their low income or credit score, can now do so.
- AutoNation's Mr Maroone is certainly correct when he states that there are plenty of sub prime borrowers eager for loans. I doubt very much that Mr Maroone would personally lend money to a sub prime borrower because he knows better. Lending taxpayer bailout money, on the other hand, is apparently a great idea. Have we already forgotten the results of lending to sub prime mortgage borrowers?
If the government really wants to get the lending machines running again, they now know where to go especially since GMAC also makes mortgage loans through its ResCap subsidiary. Here are the results of GMAC's mortgage operation:
GMAC mortgage lender's future in doubt
(courtesy of Reuters)
The Residential Capital LLC affiliate of automaker General Motors Corp may soon join the ranks of U.S. mortgage lenders that failed to navigate the deepening housing crisis.
The specter of a ResCap failure grew after parent GMAC LLC on Wednesday said "substantial doubt exists regarding ResCap's ability to continue as a going concern" absent more support from GMAC, best known for lending to GM customers.
Christopher Wolfe, an analyst at Fitch Ratings, added: "If GMAC can't provide support that ResCap needs, then bankruptcy is an option for ResCap."
The lender has lost $9.1 billion in the last two years, and said that as of September 30 it wasn't receiving interest payments on 21.8 percent of loans, up from 5 percent a year earlier.
"We can only describe credit quality trends as ugly," CreditSights Inc analyst Richard Hofmann wrote.
"With equity down to $2.3 billion, clearly ResCap cannot survive much longer at its current quarterly loss rate," he added. "Absent of any government support, we believe GMAC's statement points toward the filing of ResCap for bankruptcy."
Conclusion
Lending more money to those least able to repay guarantees financial losses on a colossal scale. In the very short term, Government subsidized lending may give the economy a modest boost. In the long term, such reckless lending will result in the insolvency of our nation.
Disclosure: None.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 21 comments:
Our country needs to downsize its consumption profile to get healthy longer term. This only delays what's needed to get to the recovery period where consumers' balance sheets will, once again, be solvent.
In China these safety nets don't exist. China has only recently become prosperous, but for the greater majority of the people, lifestyle is still at survival mode only. Even as incomes rise, this survival mode attitude will not be changing anytime soon. The Chinese government has proven to be a great student of economic policy. They are benefiting from lessons learned by watching others. It is doubtful they will make the same mistakes made in the U.S., Europe, or Japan.
On Jan 01 08:45 AM eternitus wrote:
> Lots of people with credit scores in the 600s want loans. Most of
> that group (unfortunately) is not exceptionally good at paying the
> loans back.
here's what's absurd on it's face.....thinking that it is normal and proper for any financial institution to continue to operate when it has squandered it's own capital on credit losses and comes hat in hand to taxpayers asking for more....
GMAC, like general motors which spawned it, would be flat out bankrupt without taxpayer handouts. so would every major financial institution in this country. whose fault is that?
wise up.
On Jan 01 01:25 PM jepittman wrote:
> IMO there is nothing wrong with providing credit to these people
> as long as the credit is priced properly, and if packaged and sold,
> is presented as what it is. There will always be delinquencies and
> defaults but if priced and managed by experienced lenders many responsible
> people benefit from having access to the credit as do employees and
> security holders of the many organizations that provide the product
> sold. To suggest that ONLY those with prime credit ratings have access
> to credit is IMO absurd on its face.
Eternitus' comment is great -"Lots of people with credit scores in the 600s want loans. Most of that group (unfortunately) is not exceptionally good at paying the loans back."
1.There is plenty of money in America to make car loans. Every community bank, large bank, credit union, etc. has funds available to do so, and at very attractive rates.
2.Banks will make the loans, but that is not want GM and/or the Treasury wants. GM wants "loose credit". They need inprudent lending from inprudent lender(GMAC) to inprudent car buyer/consumer/Borrowe... Then , they can kick the can down the road a little longer, until these loans default.
3.Sales of cars on credit to non credit worthy borrowers are simply not "sales" in the firstplace.
4.Why would the FDIC allow GMAC into the deposit insurance system with their record? Why wold the FDIC issue TLGP guaranties of GMAC debt with their track record? If FDIC reserves prove inadequate, will anyone be surprised?
5.The financial system, financial institutions and the credit markets will not return to normal until there is TRANSPARENCY and until the market is convinced that debt is collectible, prudent and real. Thus, the Fed and Treasury are adding to the problem by subsidizing this zombie named GMAC.
6.Is there anyone at the Fed or Treasury that was shocked or concerned with the announcement by GMAC, ten minutes after receiving the govt handout/bailout, that GMAC was dropping its prudent lending standard? How long were those standards in opertion, about 60 days?
7.Is GM's only hope for sales based on GMAC and its "subprime" car loans?
Where and when does the nonsense end?
GM DEBT IS SELLING AT 50% OR LESS OF FACE VALUE; LOANING TO THE LOWEST RATED BUYERS WILL ASSURE CONTINUING DEFAULT STATUS TO THE VERY COMPANIES GOVT IS TRYING TO RESURRECT. THE EFFORT WILL BE DOOMED. IT SEEMS THE GOVT IS TAKING OVER THESE COMPANIES NOT TO SAVE THEM BUT IN AN EFFORT TO KEEP THE PLANTS OPEN AND THE FACTORIES RUNNING AND CUSTOMERS BUYING, REGARDLESS OF THE UNDERLYING FAULTS IN THE FINANCING. HOPEFULLY THE NEW ADMINISTRATION WILL HAVE A DIFFERENT AGENDA AND WISER CAPTAINS. THE PLANTS SHOULD RUN ONLY IF THERE IS A SOUND BUSINESS PLAN AND THE PLANTS SHOULD PRODUCE CARS AMERICA WANTS - EFFICIENT, AFFORDABLE AND WITH A LOW OR NO CARBON FOOTPRINT.
Put your crack pipe away and try and research what you are reporting before you actually put pencil to paper.... 580 and less is considered subprime! There are many reasons why a credit score would be below that almighty 720..
Many small business owners for instance float there business expenses via credit.
Creditors have made a vicious mission on curbing spending... hence lowering credit limits... this of course will decimate some responsible credit users by the virtue of lowering there available credit limits...
Just one collection account from misapplied co-pay from a medical bill that goes to collection will drop a score as much as 100 points....
What’s your score? bet not too high; based on the fact that you probably pay your bills like you report the realty of things!
You reporters are part of the problem.. get your facts straight, report factual news.... if not; be accountable for what you cause....
This recession will go down in History... as the first time the Media has single handedly caused the demise of the financial stability of our Nation.. GREAT JOB... !!!!!
On Jan 01 02:09 PM icandoitdon wrote:
> good grief...
>
> here's what's absurd on it's face.....thinking that it is normal
> and proper for any financial institution to continue to operate when
> it has squandered it's own capital on credit losses and comes hat
> in hand to taxpayers asking for more....
>
> GMAC, like general motors which spawned it, would be flat out bankrupt
> without taxpayer handouts. so would every major financial institution
> in this country. whose fault is that?
>
> wise up.
>
> On Jan 01 01:25 PM jepittman wrote:
On Jan 01 03:25 PM countrybanker wrote:
> The Treasury again picking winners and losers. The GMAC bailout was
> a gift to Cerebus and GM.
>
> 1.There is plenty of money in America to make car loans. Every community
> bank, large bank, credit union, etc. has funds available to do so,
> and at very attractive rates.
>
> 2.Banks will make the loans, but that is not want GM and/or the Treasury
> wants. GM wants "loose credit". They need inprudent lending from
> inprudent lender(GMAC) to inprudent car buyer/consumer/Borrowe...
> Then , they can kick the can down the road a little longer, until
> these loans default.
>
> 3.Sales of cars on credit to non credit worthy borrowers are simply
> not "sales" in the firstplace.
>
> 4.Why would the FDIC allow GMAC into the deposit insurance system
> with their record? Why wold the FDIC issue TLGP guaranties of GMAC
> debt with their track record? If FDIC reserves prove inadequate,
> will anyone be surprised?
>
> 5.The financial system, financial institutions and the credit markets
> will not return to normal until there is TRANSPARENCY and until the
> market is convinced that debt is collectible, prudent and real. Thus,
> the Fed and Treasury are adding to the problem by subsidizing this
> zombie named GMAC.
>
> 6.Is there anyone at the Fed or Treasury that was shocked or concerned
> with the announcement by GMAC, ten minutes after receiving the govt
> handout/bailout, that GMAC was dropping its prudent lending standard?
> How long were those standards in opertion, about 60 days?
>
> 7.Is GM's only hope for sales based on GMAC and its "subprime" car
> loans?
>
> Where and when does the nonsense end?
as for lower income people needing vacations too, why stop there? let's buy em a nice house and pay for their internet and cable tv so they can be connected. we can pay for it with the money tree that grows behind the federal reserve building.
j
On Jan 02 08:26 PM jepittman wrote:
> You have your opinion of what is absurd and I have mine. The Federal
> Reserve has decided GMAC deserves assistance. That is a fact and
> my opinion does not matter. Lower income people need automobiles
> to get to work, support a family, take a vacation, even go to the
> grocery store. They need reasonable credit to purchase a vehicle,
> which has a life of many years. Some have suggested that only those
> with prime credit be afforded credit for cars and trucks. This is
> what I consider absurd. There are many lenders (GMAC is among them)
> with vast experience lending to people with credit scores 600 and
> up. 'Wising up" is recognizing that it is good business for the manufacturer,
> the supply chain, their employees and the economy as a whole to provide
> reasonable credit to people who need it for what has become a neccesity
> in today's society.
I have made many loans to consumers for autos, those consumers being both low income, middle income and wealthy.
Here is what you are missing:
1. "Federal Reserve has decided" is your first bad analysis. It is wrong for the Fed to do this. Do your research on the unprecedented acts of the Fed. Not Good. We will all pay for their lunacy. Second, Fed just allowed them to be a BHC, it was the Treasury(taxpayer)who pumped in the money.
2. Noone posted that poor or low income people do not deserve credit! of course they do, but you then use word "subprime". Regardless of how you wish to label things, only extensions of credit that will be repaid should be made, should be pooled and securitized. Its the uncollectible bad credit and the volume of the same, along with the lack of disclosure and transparency which created the credit crisis. Putting bad credit on the books serves noone, the debtor, creditor, GM or the citizenry. Just the opposite is true.
3.Most low income people have great/excellent credit, this is not about class warfare. Stay away from there.
4.Why would you cite GMAC as a company capable of managing credit. They are effectively bankrupt. Thats why there is a bailout of GMAC as well as GM. GMAC cannot sell its paper in the capital markets; the market has spoken. GMAC is not creditworthy itself.
5. Finally, your last paragraph is true, because you now say "reasonable credit", which is good for the economy, GM,its employees, etc.
However, bad credit has the opposite long term effect. GMAC practices have to be questioned because they just went broke, they just made huge credit mistakes, they were just forced to beg you and me for a bailout, and 10 minutes after receiving it, they announce looser credit standards. Why would we taxpayers trust them.
As a new point, was the bailout fair to Ford? Ford Credit? All the credit unions, S&L's and commercial banks accross the country? Of course not. If this bailout shifts sales to GM from Ford and Ford closes a plant due to less sales, was it fair to that laidoff Ford factory worker?
I suppose I am now a Ford employee to. ? By the way, do you work for a failed company named GMAC?
On Jan 02 08:31 PM jepittman wrote:
> It sounds to me like you have been in competition with GMAC for car
> loans.
On Jan 03 02:18 PM countrybanker wrote:
> jepittman:
>
> I have made many loans to consumers for autos, those consumers being
> both low income, middle income and wealthy.
>
> Here is what you are missing:
>
> 1. "Federal Reserve has decided" is your first bad analysis. It is
> wrong for the Fed to do this. Do your research on the unprecedented
> acts of the Fed. Not Good. We will all pay for their lunacy. Second,
> Fed just allowed them to be a BHC, it was the Treasury(taxpayer)who
> pumped in the money.
>
> 2. Noone posted that poor or low income people do not deserve credit!
> of course they do, but you then use word "subprime". Regardless of
> how you wish to label things, only extensions of credit that will
> be repaid should be made, should be pooled and securitized. Its the
> uncollectible bad credit and the volume of the same, along with the
> lack of disclosure and transparency which created the credit crisis.
> Putting bad credit on the books serves noone, the debtor, creditor,
> GM or the citizenry. Just the opposite is true.
>
> 3.Most low income people have great/excellent credit, this is not
> about class warfare. Stay away from there.
>
> 4.Why would you cite GMAC as a company capable of managing credit.
> They are effectively bankrupt. Thats why there is a bailout of GMAC
> as well as GM. GMAC cannot sell its paper in the capital markets;
> the market has spoken. GMAC is not creditworthy itself.
>
> 5. Finally, your last paragraph is true, because you now say "reasonable
> credit", which is good for the economy, GM,its employees, etc. <br/>
>
> However, bad credit has the opposite long term effect. GMAC practices
> have to be questioned because they just went broke, they just made
> huge credit mistakes, they were just forced to beg you and me for
> a bailout, and 10 minutes after receiving it, they announce looser
> credit standards. Why would we taxpayers trust them.
>
> As a new point, was the bailout fair to Ford? Ford Credit? All the
> credit unions, S&L's and commercial banks accross the country?
> Of course not. If this bailout shifts sales to GM from Ford and Ford
> closes a plant due to less sales, was it fair to that laidoff Ford
> factory worker?
>
> I suppose I am now a Ford employee to. ? By the way, do you work
> for a failed company named GMAC?
>
>
Solve a debt crisis by encouraging debt to those who should not assume it. Only government could come up with this plan.
The goal is to move cars off the lot and keep dealerships open for the time being. If people default, the hope is that it will happen in 6 months to a year and it will be absorved by...guess who...the taxpayer yet again!
It's amazing how people cheer on more indentured servitutde for themselves via socialized losses and generating a need for higher taxation.
We're encouraging more debt living and punishing the responsible - this won't end well.