Loans Creating Auto Bubble
Washington Free Beacon
General Motors has flooded financial markets with auto-backed securities in an effort to offload its risky subprime loans onto banks, a strategy industry insiders say could produce a bubble.
High production costs and falling profit-per-car have led auto manufacturers to turn to financing to earn higher profits. Automakers have capitalized on lending by not only loaning money to customers but also packaging and selling those loans to investors in a manner similar to the sale of mortgage-backed securities that created the housing bubble.
The dramatic increase in securitization has coincided with GM’s acquisition of AmeriCredit, one of the nation’s largest subprime auto lenders, which it renamed GM Financial (GMF).
“It’s becoming Fannie Motors,” said Competitive Enterprise Institute finance scholar John Berlau, referring to the government-backed housing lender Fannie Mae. “They’re still using our tax dollars to break into exotic and money-losing propositions from Chevy Volts to subprime loans, both of which could literally and figuratively blow up in their faces.”
85 percent of GMF loans are subprime.
GM has redoubled its efforts to capture revenue from the banks. The company issued nearly $60 billion in asset-backed securities (ABS) between 1994 and 2010. The bailed out automaker issued $5.6 billion in securities in 2012, a 50 percent jump from the average ABS issuance between 1994 and 2010 and $1 billion more than 2011, according to GM Financial spokeswoman Chrissy Heinke...
“Securitization is happening everywhere in the industry,” said Ed Niedermeyer, an auto industry consultant. “They have to be greedy because the fundamentals of the car business are not sound. If the fundamentals were sound, they could profit like everyone else is.”
Auto-loan backed securities are among the fastest growing financial instruments, growing to nearly $100 billion in 2012. Investors are attracted to the relatively low risk, high collateralization, and short turnaround in the auto market, according to risk analyst Christopher Whalen.
“Auto paper has behaved well even during the recession,” he said. “The average lifespan is less than two years…[it] doesn’t have long term risk of a 30 year mortgage.”
GMF has the riskiest lending portfolio of any major car company: 96 percent of its customers have credit scores below 660. GM’s lending habits parallel those in the housing market leading up to the 2008 crash, Niedermeyer said.
READ FULL SOURCE ARTICLE: 02/22/2013
Editor's Note: No more bailouts...to anyone...ever.
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