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GM Using ‘Subprime Loans’ To Boost Sales

From Investors Business Daily:

GM Ramps Up Risky Subprime Auto Loans To Drive Sales

By DAVID HOGBERG | Friday July 27, 2012

President Obama has touted General Motors (GM) as a successful example of his administration’s policies. Yet GM’s recovery is built, at least in part, on the increasing use of subprime loans.

The Obama administration in 2009 bailed out GM to the tune of $50 billion as it went into a managed bankruptcy.

Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM’s growth. The automaker is relying increasingly on subprime loans, 10-Q financial reports shows.

Potential borrowers of car loans are rated on FICO scores that range from 300 to 850. Anything under 660 is generally deemed subprime.

GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.

The worse the FICO score, the bigger the increase. From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores — below 540 — shot up 79% to more than $2.3 billion. The second worst category, 540-599, rose 28% from about $3.4 billion to $4.3 billion.

Prime loans, those above 660, dropped 42% to $676 million…

As we noted last week, all of this concern about credit scores will soon be a thing of the past. Now that the federal government is going to regulate the firms that do credit ratings.

From now having a low credit score will no longer be a problem, at least not for Democrat constituents. Their credit scores will be given an affirmative action boost.

At the peak of the credit crisis and recession in late 2008, Ally announced that it would move away from subprime lending. By spring 2010 GM’s new management, led by North American executive Mark Reuss, wanted to move back into subprime, fearing that GM couldn’t compete…

[S]ince it acquired GM Financial, GM has seen its subprime loans grow from about 4.8% of sales in Q4 2010 to 8.2% in Q1 2012. The industry average is about 6%.

"Is GM taking on more risk than is safe given our uncertain economy?" asks Edward Niedermeyer, TheTruthAboutCars.com editor-at-large. "They may be trying to goose short-term sales with subprime lending to boost its stock price, which is tied to the government getting out of its GM investment."

Perhaps we are cynical, but we suspect this is being done to pump up their sales before the elections, so Obama can continue to claim he saved GM. And who cares how many bad car loans come out of it.

GM has to help the boss get re-elected.

GM still owes about $26.4 billion in direct aid to the federal government. The Treasury owns 26.5% of the automaker, or 500 million shares. The stock price would need to be 53 to recoup those taxpayer costs.

GM shares closed Friday at 19.67 after hitting a post-IPO low on Wednesday.

So this strategy is not helping their stock price, after all.

When pushing the Dodd-Frank financial overhaul, Obama told Americans, "you have a stake in it if you’ve ever tried to take out a home loan, a car loan, or a student loan, and been targeted by the predatory practices of unscrupulous lenders."

While the administration has targeted subprime mortgage lending, it seems to have turned a blind eye to auto subprime loans…

And now we know why.

This article was posted by Steve Gilbert on Monday, July 30th, 2012. Comments are currently closed.

One Response to “GM Using ‘Subprime Loans’ To Boost Sales”

  1. GetBackJack

    Lots of unemployed poor inner city folk ’bout to get them a Caddy-lac, baby ,,,,


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