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GM jumps back into subprime lending market

July 28, 2010

By Jim Hagerty
Staff Writer

Not two years since nearly toppling, General Motors is back in the subprime loan game. Although the company has no plans to return to the mortgage industry, it agreed to buy auto lender AmeriCredit Corp. last week for $3.5 billion in cash.

Before the 2008 banking tumble, GM owned GMAC, one of the largest lenders in the United States. Now Ally Financial, GMAC was known for competitive auto financing on GM lines and subprime mortgages traded by its wing, Residential Capital.

When the financial crisis reached its peak, GMAC’s mortgage line was nearly wiped out, leaving the company sitting on a mountain of bunk securities and, eventually, a sea of foreclosed homes. Today, the company said because the major blows were caused by defaulted mortgages, not auto loans, a move back to non-real estate financing is a wise move.

Based in Fort Worth, Texas, AmeriCredit was formerly known as a major subprime auto loan player and will continue to make loans to those with less-than-perfect credit. The company is also set to replace GMAC as the main financing arm of General Motors.

Some question the transactioin, citing the possibility of losing just as much money in subprime auto financing as GM lost in the mortgage sector. Such losses could be realized quickly, especially if the company offers long-term loans, little down payment and low interest, to borrowers with bruised credit.

Ratings guru Sean Egan, of Egan-Jones, said last week a proper balance of cheap, short-term loans and long-term programs may be the only way a GM/AmeriCredit marriage will work.

“Hopefully, history is not a good indication of the future because the history has been miserable,” Egan said. “GM’s current management seems much more attuned to proper business practices than it used to be.”

In spite of criticism, analysts say GM must have its own auto lending wing to compete with strong players like Ford Credit, which never dabbled in real estate financing and which many still claim played a significant role in keeping Ford Motor Co. out of the clutches of bankruptcy.

When GMAC was bombarded with mortgage losses and had to be bailed out by the U.S. Treasury, the company was forced to bail from the auto financing market. Millions of car buyers were suddenly unable to qualify for loans, namely through a strip-mined GMAC. Meantime, GM’s sales nose-dived.

General Mortors execs said Friday, July 23, the company’s lack of subprime financing in the past left thousands of car sales on the table. Adding sensible products to the mix will allow the company to sell more cars and access the lower end of the consumer credit market.

From the July 28-Aug 3, 2010 issue

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