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GMAC's Woes Will Crimp Car Sales
At a time when GM and other automakers need to move as many vehicles as they can, financing arms like GMAC are tapped out
By David Welch

As if a $2.5 billion third-quarter loss weren't enough, lender GMAC Financial Services also said tight credit markets could force it to further restrict loans to car buyers.

That would make life even tougher for General Motors (GM), which relies on GMAC as a principal lender to its dealers and customers. GM said on Nov. 3 that tight credit was to blame for about half of its 45% sales decline in October. GM owns 49% of GMAC and private equity firm Cerberus Capital Management, which also controls Chrysler, has owned the rest since April 2006.

Most of GMAC's losses—$1.9 billion worth—came from its ResCap mortgage unit. But the auto lending operations also lost $294 million. With credit markets tight and the asset-backed-securities market just about closed, GMAC Chief Financial Officer Robert Hull warned in a conference call that the company may have to make fewer loans. "This is the most difficult environment we have ever faced," he said.

Lingering Crunch
GMAC's third-quarter loss widened from $1.6 billion in the same quarter last year. The company has been in a crunch since the housing market began its tumble. ResCap started showing losses in 2006 and has lost more than $9 billion since the fourth quarter of that year.

It's so bad that the company said ResCap could fail without continued help from GMAC. That means the unit could continue to be a cash drain on the lender.

The company's woes are compounding already massive problems at GM, which has lost more than $18 billion this year. GMAC already sent a note to dealers saying the company would write loans only for prime-credit borrowers (BusinessWeek.com, 10/14/08). J.P. Morgan analyst Himanshu Patel said in a research note that GMAC's liquidity problems could continue to hurt car sales.

GMAC has a few options to get more cash to make loans. Hull said the lender may ask current GMAC bondholders to exchange their debt for new issues. He didn't provide details, but one option is to trade short-term notes for longer-term debt. That means GMAC could forgo payments and use the freed-up money to write new loans.

Looking to Uncle Sam
The lender could also use the Federal Reserve's Commercial Paper program to sell more asset-backed securities to the Fed and raise cash. So far, GMAC has sold $5 billion in paper to the Fed.

GMAC also wants to use the Treasury Dept.'s Troubled Asset Relief Program (TARP) in which the federal government buys stock in financial institutions or nonperforming loans. GMAC would sell loans to the Treasury to get more cash to lend.

But its biggest move is an application to become a bank holding company. Hull said the application has been filed with the Fed but has not been approved yet. If it is, GMAC would have more access to the Fed's discount funds window and could issue debt that is secured by the FDIC to raise money.

All of those methods hold promise, but for the time being GMAC will have to tighten its credit standards and, hence, the number of car loans the company can make.

That's why GM executives have been lobbying the government for help for the carmaker and its lending operations. On Monday, Michael DiGiovanni, GM's executive director of global market analysis, said: "It's critical for the banks and the government to help us."

Full text: http://www.businessweek.com/bwdaily/dnflash/content/nov2008/db2008115_082572.htm?campaign_id=yhoo
 

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We used GMAC for 90% of our loans, up until September. Now, they account for less than 10%. However, other banks and area credit unions are being very competitive, so it's better for our local economy.
 

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Well at least it cuts down GM's exposure to the credit market. Usually there is a willing and able credit union in the area to provide a competitive rate for those with decent credit.

The buyers with poor credit will fall through the cracks though...is this a good thing or a bad thing?
 

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I'm trying to figure out how this is actually such a bad thing. There's a certain segment of the population who, for a variety of reasons, has poor credit. That is, they are risks to GM/GMAC's bottom lines at some point. Denying them access to credit will obviously have the negative impact of decreasing car sales shorter-term, though long-term there presumably will be fewer bad loans on the books. After all, while many presently are pre-occupied with the mortgage meltdown, I do believe that we have yet to hear from the auto loan market. Many people are upside-down on their auto loans, the economy's struggling, unemployment is rising. It doesn't take a rocket scientist to figure out that there will be scores of people simply walking away from their vehicles.

Credit is tight for some. My credit line was increased 20% for my business (without my asking, which kinda upsets me, but that's neither here nor there), and my personal line of credit was increased by about 17-20% (again, without my asking). I take that to mean that people with good credit should have no problem securing access to cash. Others with less than stellar credit will be the ones suffering a bit. But in light of the above, doesn't that make sense?!

An economy built on bad credit, an economy loaded with bad debt is not a course the country should plot. Reversing that will take some time and short-term pain, but we'll be better off in the long-term.
 

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One final time............... a person with a 680 FICO score, does not have bad credit, poor credit, etc. They are not part of the problem.

The vast majority of American consumers, have a FICO score between 600 and 700.

GMAC picked the 700 number out of the sky, as it forces them to make less loans available. Plain and simple. If that doesn't work, then they limit how much they will lend (which they have) to these people with stellar credit. If that doesn't work, they will make debt ratio limits much harder to achieve.

In other words, since they have little to lend, they will only take the platinum of the gold of the perfect borrower.

If all business's did this, the economy would COMPLETELY collapse.

PS, some of us with poor credit scores are not poor risks. You have to look at the entire picture. If you have a poor score, but a good down payment, great job time, great income, and a great debt ratio, you are a very good risk. Poor credit scores happen for a multitude of reasons (like 9/11 and Katrina), and take years and years to fix.
 

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The minimum midFICO score for a conforming residential mortgage at my employer is 680. Fanny/Freddy will deviate based on LTV, back-end D/I, etc.; however, many of the financial institutions which did not facilitate the current credit fiasco have not deviated from their historical credit standards, like what's stated above. The house is the last thing to go. Credit cards first, autos second, commercial/investment property third.

Auto loans, or indirect lending, is inherantly risky, with a highly depreciable, disposable piece of collateral. Unfortunately in the past, the FICO as a default projector, has been highly accurate. A higher FICO score requirement is warranted. If 1:5 under 680 score loans goes bad, you've lost all the money made on the other 4 loans. It could even be worse depending on the auto financed. A truck, even discounted at purchase (a loss of potential profit) would cost an average of $1000 to retreive, will usually have reconditioning, and sell at wholesale for half the original purchase price.

If GM/GMAC/GMwhateverit'scallednow could, they would have raised the FICO requirement higher.

As it is, GM is finally lending with sense and not repeating what Mitsubishi did 4 years ago.
 

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GMAC is lending directly opposite of what Mitsubishi did 4 years ago.

Mitsubishi would give anyone who had a drivers license, an auto loan, at ZERO percent, with ZERO down.

GMAC, currently, will not even give a well qualified buyer a loan............. and will look for any excuse to deny them.

I was in the mortgage business when the FICO system came into being. I know what it was sold as................ and what it really is. It is an excuse for lenders to not actually have to underwrite anymore............... as they can hire any idiot to plug a FICO score into an interest rate table. It is also an excuse to punish good people, by charging them higher interest rates, because of something as umbiguous as a FICO score.

When credit reports are accurate, and are not manipulated to hurt people............ then I might actually respect it a little bit. Until then, it is crap........... and another "excuse" to charge the majority of the people, more money. Especially when 80% of all credit reports have mistakes on them.

This situation is the end result of many problems. One of the big ones, was the elimination of actual underwriters.............. who could look at entire pictures.............. and make educated decisions about risk. When there were actual underwriters, who did "makes sense lending," you did not see this prolification of 1.9%, interest only, 100%/103%/105% purchase money loans. That kind of crap never flew with actual underwriters, since they actually had something at stake.............. based on their decisions.

Go tell the person who lived through Katrina.............. or continue to sit there and tell me, who lost their business due to 9/11............... and is still paying for it (paying everything off........... doing the right thing............. and being treated like scum of the earth for it).............. that we are deadbeats who do not deserve to buy anything, due to the FICO system.

BTW, we got Tier 2 financing, on our truck. $8500 off of MSRP, plus we put 20% down in cash, have perfect auto and home credit, great job time, great income, and low debt ratio. Yet, our FICO score is garbage. Yeppers, we sure are a bad risk.
 

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Just more excuses...there's plenty of banks and credit unions that are loaning money out there...you just need to be credit-worthy now. The days of someone with a 500 FICO score buying a new car for $0 down and 0%/72 months are over.
 

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Since 9/11, GM has given out beyond 'A' rates to customers who didn't deserve it. It has only been recently that this credit has tightened. And based on the borrowing ability of many consumers today, a 6% auto rate is Mitsubishi from 4 years ago.

The amount of money GMAC has to lend is miniscule at this time, and as a fan of GM, that scares me. Their policy shows just how scarce funds are.

Lenders who do not keep their loans in house rely more on FICO, or some other industry specific scoring method. Those are also the ones who eliminated in-house underwriting, I agree.

Looking at credit bureaus since 1997, I disagree with an 80% inaccuracy statement.

Those who still look at the 'whole picture' are your local community bank. As the head of all credit, commercial and consumer, for my employer, also a local community bank, I can tell you that I make sure that is done every day, 365. We have never done any 103/107, no doc, lo doc, interest only, alt-A or teaser arms for residential. We did not invest in derivatives or CMBS's, and we've never gone over 80% on commercial, under 1.25DSCR or deviated from tried and true commercial lending policies. We were listed as under-performers in the stock market in 06-07 because we didn't hedge everything just to satisfy a 10k. Everything we approve stays in house. We also blew past estimates for 08 and declared record profits this year, and that is for a bank over 80 years in total, and a delinquency rate of less than 0.15% and $0 charge-offs.

I am not going to tell anyone that they are deadbeats. I do not treat any person, client or otherwise, like they are the scum of the earth. I am only going to talk about what the credit market is like today, and why I believe they went in the direction they did.

So why are you trying to p*** on me, when I was stating what the credit market is generally like today, better or worse?

BTW, good on you for getting that deal.
 

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Well at least it cuts down GM's exposure to the credit market. Usually there is a willing and able credit union in the area to provide a competitive rate for those with decent credit.

The buyers with poor credit will fall through the cracks though...is this a good thing or a bad thing?
If the person defaults on the loan its a bad thing. If the person does pay off the loan its a good thing (for both the bank and the person)

Anyways, is it a mandate to do financing through GMAC?
I think it would be more easier to do it through a credit union or some other bank. In these times though, who knows
 

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Since 9/11, GM has given out beyond 'A' rates to customers who didn't deserve it. It has only been recently that this credit has tightened. And based on the borrowing ability of many consumers today, a 6% auto rate is Mitsubishi from 4 years ago.

The amount of money GMAC has to lend is miniscule at this time, and as a fan of GM, that scares me. Their policy shows just how scarce funds are.

Lenders who do not keep their loans in house rely more on FICO, or some other industry specific scoring method. Those are also the ones who eliminated in-house underwriting, I agree.

Looking at credit bureaus since 1997, I disagree with an 80% inaccuracy statement.

Those who still look at the 'whole picture' are your local community bank. As the head of all credit, commercial and consumer, for my employer, also a local community bank, I can tell you that I make sure that is done every day, 365. We have never done any 103/107, no doc, lo doc, interest only, alt-A or teaser arms for residential. We did not invest in derivatives or CMBS's, and we've never gone over 80% on commercial, under 1.25DSCR or deviated from tried and true commercial lending policies. We were listed as under-performers in the stock market in 06-07 because we didn't hedge everything just to satisfy a 10k. Everything we approve stays in house. We also blew past estimates for 08 and declared record profits this year, and that is for a bank over 80 years in total, and a delinquency rate of less than 0.15% and $0 charge-offs.

I am not going to tell anyone that they are deadbeats. I do not treat any person, client or otherwise, like they are the scum of the earth. I am only going to talk about what the credit market is like today, and why I believe they went in the direction they did.

So why are you trying to p*** on me, when I was stating what the credit market is generally like today, better or worse?

BTW, good on you for getting that deal.
Sorry if I came off a little harsh. :)

I just get kind of tired of some people, who really know nothing about credit, or the industry, chiming in............ like they are some kind of expert. They justify what GMAC is doing, by making blanket statements................. like everyone below a 700 FICO score has bad credit/poor credit, etc. Most of them don't even realize that you can have a 100 point difference between the 3 bureaus............... or more.

I realize that you are not "that" person/people.

Frankly, it is refreshing to see someone who actually works in the industry. I did, for 7 years, and got out in late 2005. I did not like the direction the industry was heading. It turns out I made the right decision. I specialized in helping people with "challenged" credit buy a home............. or refinance. I was not the rich loan officer, thats for sure. However, I did sleep good at night.

I never did commercial lending.

We got our truck loan with Ford Motor Credit, which is who we had used on prior vehicles also (well, Mazda Credit on one............ same thing). We bought the truck in July. Thus, they knew we were a good risk. It would serve people well to make those type of relationships with their lenders, as they would find it easier to do things................... especially in these challenging times.

People have gotten so used to playing everyone off of each other, to save an 1/8th, that they have forgotten how to look at the whole picture, the small print, and what something actually costs them.
 

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Sorry if I came off a little harsh. :)
Not a problem. I agree with you about understanding credit, like when having one credit card at 10% of maximum can drop your score by 25 points. FICO's not fair, but it gives a starting point, and for many who don't understand finance, it's a great way to cheat.

I also know that there's alot of verbal combat here......

I've been in commercial lending for all my career, residential is something I've been asked to take on over time. Started with FU. Happy to see them gone. But people can make the most difference when working within the community, so now I hope to use big business knowledge in a local environment until I retire.

Having a history with a lender is the most important thing any consumer can do. Moreso than any FICO or tax return. FoMoCo should have treated you well as you had a good history with them.

GMAC has big problems, more than any financial statement will lead on.

Again, good on you for trying to help others. If you were closer, I'd ask if you could help with a head/cam swap on my Z.

Cheers.
 

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LOL.............. would be more than happy to.

Since we moved here to Payson, we have not had a garage. It is a living hell. LOL

Once we get the rest of our stuff paid off (should be next year some time. We lived off of CC's and selling vehicles for 14 months after 9/11 killed our business........... and that was with a new baby), a garage is one of the first things we will save for. We will not get a loan, as we enjoy having equity, and a low LTV.

Its always funny, because men are always surprised that I wrench (yes I am a woman). I have to remind them that our auto repair and towing business was a one man, one woman operation (we were in central NV). Rick is better at carburators, and I am better at FI.

Back on topic. I guess that I just have a real problem with the FICO system, because I have seen how so much of it makes no sense. It is a system that sets you up to fail, because you have no idea how they arrive at the numbers. Also, any joker company can reage an old item, no matter how old it is, and it is up to you to prove it shouldn't be there. In other words, once again, you are guilty............ and have to try to prove yourself innocent. This is huge right now, with the bottom barrel collection agencies buying 10-15 year old paper............. paid for or not.............. and trying to force you into repaying. Well, that, and killing your credit score. Its just another scam, and they know how to work the system to their advantage.

Anyway, sore subject.

You will find the residential lending to be very rewarding (for me, it was so personally, not monetarily, thats for sure. LOL)............. and the most frustrating thing you will ever do. I hope you are working for a particular lender only. Working for a brokerage introduces you to every investor on earth, who will lie through their teeth, to get you to send them deals. It gets old, real fast.

I agree with the problems with GMAC. That is certainly looking bleak.
 
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