http://www.nytimes.com/2010/07/23/business/23autos.html?_r=1&hp#
I don’t even know how to frame a debate, so I’ll settle for.
Resolved: WTF? How does the government (who had no business bailing them out) not put sufficient scrutiny and controls on them to prevent what will inevitably be Groundhog Day?
From the article:
Emphasis added.
Doesn’t sound like a repeat of the housing crisis to me. It sounds like GM is being hurt by a lack of available credit to potential customers and moved to fix the situation.
I saw that part. But “otherwise pose a low risk of default” sounds to my ears a lot like “other than that Mrs. Lincoln, how did you enjoy the play?” And “available credit” and “potential customers” all have to be viewed in the light that credit isn’t “available” 'cause they don’t meet loan underwriting best practices, i.e., they may well be “potential” car buyers in the way I’m a potential suitor to Giselle Bundchen.
My point is that the non-crooks (and there were some) who wrote subprime house loans never wrote them with the assumption that the borrowers weren’t “otherwise qualified.” The rub is that they systemically underestimated slow-pay/no-pay likelihood for these borrowers.
It may be that underwriting practice was so ridiculously over-tightened in the past two years that this is a necessary and modest step toward loosening, but we certainly heard the “few minor black spots on the credit record, but otherwise a good buyer” spiel when subprime came around the first time.
The other factors that make me deeply suspicious of GM’s motives and due diligence are (a) car execs thrive by goosing sales, everyone knows that; and (b) they’ve just been massively bailed out for their previous poor judgment, and some part of them has to think that if these loans go South, “something will come along.”
The big banks are not lending like they should. They get free money from the government and feel no need to help fix what they damaged. Gm is just trying to bypass the banks . The government should have taken over a bank and made sure the economy was jump started. They were afraid of the rich and did not do what was needed. You can sit around and bitch at the banks and ask Geithner to intervene, except he works for them and would not, or you can work around them. GM was smart . They want to sell cars.
Also related - Auto Dealers fought to be exempt from new consumer protection rules and won.
From that NPR article
"The new law represents the biggest change to financial rules in decades. But it largely excludes one group of lenders: Car dealers fought to be exempt from the new bureau’s oversight, and they won.
“It’s a huge loophole because auto lending is second only to home mortgages and bigger than credit cards,” said Rosemary Shahan, president of a California-based consumer group that specializes in cars and car loans."
In my opinion the government gave them a free pass to continue duping financial idiots because they knew the issue would fly under most peoples’ radar.
This isn’t a new business for GM. Until 2006 they owned GMAC, to finance the purchace of their cars.
The Wall Street Journal article has a lot more information about GM and auto financing, including:
Ally is the current name of the old GMAC.
So even today, Ally finances 1/3 of all of GM’s US car sales, and 90% of the dealerships.
It sounds like GM is regretting selling off GMAC, reallizes that it is beneficial to GM to have their own financing division, and is doing something about it.
Ally is not the same thing as GMAC. When it was GMAC part of its mission was driving car sales, and to take mad risks if necessary to do it. When separated from the automaker, it became a real bank, balancing risk and return on the basis of underwriting standards. This is of course not good for GM’s car business. GM’s managers would rather boost this quarter’s earnings by selling cars to people who may never pay, and pretending that they will pay, principal and interest. Until they don’t pay that is. Then of course the government will have to bail them out again. Because GM is too big to fail.
Right, but IIRC, the problem that happened wasn’t that you had shady characters taking out mortgages that defaulted on them because they turned out to be dishonest.
You had the subprime industry getting these people into “creative” loans that became too much for them. And these creative loans meant that buyers could afford a higher dollar house, so home prices rose, leading to even more creative financing, leading to rising home prices, etc. until the whole house of cards came tumbling.
So, IMHO, the lesson we learned is to make sure that people have the ability to repay these loans. Verify incomes and analyze debt to income ratios to make sure that people aren’t getting in over their heads.
I’ve always thought that not getting a loan because you were late on a doctor bill three years ago was ridiculously harsh and had no bearing on whether or not you would keep up your car payment.
The amount of suffering due to excessive indebtedness has been greatly exaggerated in the news. For the most part, easy lending worked, in the sense that a bunch of people got a whole lot of whatever they wanted, now, without having to work for it until later. Most people only see what’s right in front of their faces, so they couldn’t be happier. The stuff is here but the debt is somewhere else they can’t see, so it’s almost like it doesn’t exist. Once people figure out they can get stuff for a mere promise to pay in the future, you can never take that away without causing unrest. Look at the federal budget, or the California or Illinois state budgets. It’ll only end when the debt can’t be serviced any more. Unfortunately, that guarantees a “hard landing” as the economists so euphemistically call it.
I was driving through Orlando some time in 2009 and saw those little hand-lettered signs planted at every traffic light: BUY A HOME WITH NO MONEY DOWN!!! $150,000 HOMES FOR $399 A MONTH!!! This was a year after the “crash”.
If you qualify. That is harder to do nowadays. we are not back where we were by any stretch of the imagination.
Well to be fair the whole point of credit is to be able to hold off debt loads that no one could ever bear the full weight of immediately. For things like homes that you pay a mortgage on instead of paying the same amount every month as rent, or financing an automobile that gives you the mobility to work throughout a metro area, it makes economic sense.
I have a sneaking suspicion however, that one of the basic economic laws of the universe is that whenever you give away something valuable for less than it’s worth, you end up creating a niche for middlemen to skim a cut off the top. If the government arranges mortgages for people who otherwise would simply be too poor a risk to get one, then someone is going to figure out a way of extracting money from the difference between the government’s guarantee and the actual prospects of the borrowers- bundling subprime mortgages into derivatives and selling them for example.
What does this part even mean? I’ve paid things late several times and my credit score is 790. How can an “isolated negative event” like a late payment cause a subprime credit score? Or is he saying “Well, other than constantly being late with payments, Mr. Doe is a great borrower”?
I agree lenders have cut people off at the knees. My outstanding debt is around $2,300 which isn’t a lot. Last year at this time I had credit cards with credit lines well over $50,000.
Now every single credit card I had chopped me off. I got about $50 over my balance due for a limit and others like Chase and Bank of America, just cancelled my credit cards outright. This despite the fact, I was never once late, I used the cards, and had an excellent FICO score.
I went from having a Discover card with a $5,000 limit to a Discover with a $100 limit.
The credit card reform did nothing for the consumer but get those who followed the rules to have their credit reduced. Since all these credit changes were reported my FICO scores fell and my credit was harmed, but I did NOTHING to cause this.
Oh well that’s life…
If the cards were new, or if they were old and you never used them much, they could have negatively affected your credit score. Also, is it possible there were other things going on with your credit score that made the banks take a closer look at your credit card accounts?
Except that Ford posted a quarterly profit of 2.6 Billion.
If this causes a bank bailout there will be hell to pay.
Did you read the article? Ford has an in-house finance arm. They aren’t dependent on banks to give car loans. So does Toyota. That’s why GM wants to get the ability back.
It didn’t say anything about Ford making sub-prime loans. Assuming (for the sake of argument) that is true, the risk isn’t backed with tax payer money.
For starters, seems to me that the order of magnitude has some bearing. Sure, buying a thirty thousand dollar car, maybe, but its not buying a three hundred thousand dollar house.
And used to be, getting a car was a major boost to your potential for getting a job. These days, however, its probably just the difference between piss poor and not very good. Makes more sense in better times, to encourage debt that may prove productive. Get a car, get a job, make the payments. Can’t get a job even with the car, the car isn’t doing you any good, and losing it won’t make you much worse off.
Now, if we’re willing to gamble that employment will improve, or can be encouraged by such investments, then maybe it makes some Keynesian sense to extend credit for a car when it doesn’t make sense to extend credit for a house. Maybe even more so if the car employs the kind of technology we hope to encourage.
More importantly, a thirty thousand dollar car can be repossessed and resold tomorrow, while a foreclosure takes months (or years, if the homeowner gets an attorney).
a thirty thousand dollar car loses value the minute it leaves the car lot and continues to lose value toward a very short life span. Houses normally appreciate in value and are a long term asset.