Is GM headed for another subprime loan crisis?
The company has sold vast numbers of vehicles to borrowers who have a high chance of defaulting on their loans.
By Tom Blumer, The Fiscal Times
In late September, the U.S. Treasury filed its final trading plan to rid itself of its holdings of General Motors (GM) stock, signaling the imminent end of one of the most controversial chapters in U.S. corporate history.
The Treasury Department estimates that its final loss on the GM bailout will be $9.7 billion. A few years from now, taxpayers may look back and breathe a sigh of relief that the government got out when it did.
Right now, all seems well, at least on the surface. GM has posted net income of over $1 billion in each of the past four quarters. Its U.S. market share, though a mere shadow of what it was decades ago when the Department of Justice seriously considered breaking up the company, has stabilized at 18 percent.
A review of the GM's more recent SEC filings, though, indicates that the company has sold vast numbers of vehicles to borrowers who have a high chance of defaulting on their loans. Additionally, the financial condition of many of its dealers has suddenly and seriously deteriorated.
GM is hardly unique in lending money to consumers with low credit scores. Recent Bloomberg reports have indicated that the subprime auto loan market is growing, and that the industry's underwriters are increasing their loan-to-value thresholds. According to Bloomberg, "borrowers with imperfect credit. . . account for more than 27 percent of loans for new vehicles," up from 18 percent four years ago.
GM is relying on subprime borrowers far more than its competitors, though. The company's third-quarter financial report informed investors that "88 percent of the consumer finance receivables in North America were consumers with FICO scores less than 620," which is the “less than perfect" credit threshold for the subprime market. Consumer receivables 31 or more days past due, at $1.075 billion, were 34 percent higher than a year earlier. By contrast, Ford's receivables in that same category dropped by 20 percent during this year's first nine months.
GM appears to be cutting back on its level of disclosure just as things are getting worse. As seen below, its June 30 financial statement went into great detail about the credit scores of its North American borrowers:
In its report for the quarter ended Sept. 30, GM removed these details, replacing them with the terse "under 620" sentence cited earlier.
Industry experience shows that 51 percent of borrowers with credit scores between 550 and 599 will go 90 days or more delinquent. With scores from 500 to 549, that chance increases to 71 percent.
Almost 76 percent of GM's consumer loan portfolio at the end of June, up from 65 percent at the end of 2011, consisted of borrowers who are more likely than not to go seriously delinquent. Though the company's reduced disclosure prevents us from knowing for certain, that percentage was probably higher in September.
History shows that many delinquent borrowers will go from being behind on their payments to not making them at all. GM is keeping its assembly lines running on a huge gamble that their number won't be significant, and that its losses on the repossessions which do occur will be immaterial. That bet, in turn, depends heavily on a belief that an economy with the worst post-recession recovery since World War II won't flatten out or go back into the tank.
As if it needed more problems, many of GM's dealers have begun showing troubling signs of financial weakness, as seen below:
GM describes these dealer loan balances as "post-acquisition finance receivables" that "originated since the acquisitions of GM Financial and the Ally Financial international operations" in 2010. GM expects this portfolio "to grow over time as GM Financial originates new receivables." .
These loans have apparently become a temporary refuge for seriously troubled dealers. In just nine months, "dealers with poor financial metrics" or worse have gone from owing the company $12 million to being in hock for almost $1.6 billion. The obvious question is whether the dealers are good for it. If they aren't, another huge write-off looms. One also has to wonder how much these balances, especially their troubled components, will continue to grow in the coming months.
GM hasn't yet responded to a request for comment
To be clear, GM, which had over $28 billion in the bank in September, isn't going bankrupt any time soon. But whether it can remain profitable is certainly an open question.
More from The Fiscal Times
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"The Treasury Department estimates that its final loss on the GM bailout ."
Not to mention the $3 billion it layed out for the "cash for clunkers fiasco"
Is GM headed for another subprime loan crisis, - Yes. A quick look at the American business landscape is a good indicator as to why it’s yes. The quickest answer can be found in the Wilshire 5000, which is now the Wilshire 3609. At its height it was the Wilshire 6000+. Look at the components of the Dow now verses 10 years ago. The high wage, high U.S. employee count companies are gone, replaced by lower wage (all labor needed to produce the product), lower U.S. employee count companies. Yet the DOW has never been higher in value. Globalism for sure, but at what cost?
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