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 The Fiscal Times Nov 12, 2013 2:25PM

General Motors headquarters in Detroit, Mich., on June 6, 2013 (© Jeff Kowalsky/Bloomberg via Getty Images)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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128Comments
Nov 12, 2013 3:01PM
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GM Strategy.... If responsible people won't buy our cars we will just loan money to irresponsible people and get the Liberal Guberment to bail us out with responsible people's tax dollars.
Nov 12, 2013 2:53PM
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When they go bankrupt this time I hope the government lets them go under!!!!!
Nov 12, 2013 4:09PM
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Here is what worries me the most.   If we don't continue to purchase things we don't need with money that we don't have the economy tanks.   I am not trying to be funny nor do I possess a strong economics background but this worries me.
Nov 12, 2013 4:20PM
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If GM truly has $28 billion in the bank, then why are we (the taxpayers) being forced to take a loss of $9.7 billion? Isn't that OUR money? Thats like a millionaire welching on a credit card bill.
Nov 12, 2013 2:34PM
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          WHO ARE THEY GONNA SCREW THIS TIME ??????    LOL
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You can make those loans because Barry will bail you out..Uh, Barry will take taxpayer money and bail you out. It's not a "Mistake" when you have hard data telling you, emploring you, to not make loans to people with rotten credit. Duh?
Nov 12, 2013 3:46PM
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We did not learn any lessons. We pushed all the Dodd Frank BS through but did not address the problem of lending, than selling the loan, to raise more money to lend to people who won't pay it back. 
Nov 12, 2013 3:15PM
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WHERE did you hear this before? 

Scroll through my V_L (veteran lender) posts until you get to it. What goes around in loose credit, comes back totally toxic and eats your face. Isn't oodles of auto "sales" the crux of the recovery that keeps Ben Bernanke literally giving TRILLIONS to the top 5% earners in America? Maybe it's time to stop waiting for what the Fed will say, and FORCING it to go recollect that fiat cash and revive our own economy using competence and commonsense instead of corruption and Kool Aid. 
Nov 12, 2013 5:12PM
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All that crap about GM paying back their government loans early with interest was a campaign lie. They paid the loan back with another tax payer loan, and now we are screwed for billions again. Now the sub-prime auto loans are going to be heaved upon the treasury just like the bad mortgages, just wait and see. Let markets correct and lets stop the bail outs and QE crap so we can move ahead.
Nov 12, 2013 3:06PM
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GM CEO: "No biggie...Obama will just shovel more taxpayer money into our pockets if the **** hits the fan. Now, seven figure bonuses all around the C-suite! Hooray for America!"
Nov 12, 2013 5:20PM
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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"

Nov 12, 2013 2:47PM
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With 28 billion in the bank I wouldn`t cry for them.
Nov 12, 2013 5:48PM
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Why is it that everything Nobama touches turns to shat?
Nov 12, 2013 5:19PM
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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?

Nov 12, 2013 5:04PM
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I work for a GM dealer and I can say this is nothing new. We look for people who have good "car credit". Which means people who once had good credit but because of the recession fell on hard times. These people are ones that are now back on their feet and trying to repair credit. Trust me if I send over a guy that never paid anyone or anybody they won't be getting bought. The fact is bad things happen to good people folks.
Nov 12, 2013 4:47PM
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Sure, The Gooberment can pay the losers who can't buy/afford homes and cars. Or they can pay off the GM Unions.  Either way it's a loser deal because it is our money they waste.  Let em go broke and start over with a better plan.
Nov 12, 2013 5:31PM
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THIS sounds so similar to the U.S. government.
Nov 12, 2013 3:24PM
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"The obvious question is whether the dealers are good for it. If they aren't, another huge write-off looms."
 
It may be the "obvious" question but its the dumb question.  If they are following the matching principle properly they wrote the expected uncollectable amounts off when they loaned the dealer the money.  The real question is how good was their estimate of how much will be uncollected.  My guess is that their financials specifically state how they estimate bad debts.  So all the info is right there for the reporter.
Nov 12, 2013 5:21PM
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Yeah, bail out a bad business to find they still make bad business decisions. Why the heck is GM even in the fiance business anyway?  Oh yeah, sell cars to individuals who otherwise couldn't afford them...but can with GMAC financing.....until they can't make payments. When will businesses learn, if someone can't afford something, don't lend them the money to do so. Even at 6% interest, if they can't make the payments, 6% of nothing equals ....(hold on, getting my slide rule out, no, my abycuss, not wait, fingers/toes....) oh yeah.....NOTHING. But hey, GM is still "too big" to fold. Think of the Unions loosing retirement and healthcare and all the dealers and all the suppliers and all the..............................................................
Nov 12, 2013 4:50PM
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No bail out second time. GM did not learn a thing from the first mess. They are back to building to many different models and styles and none are selling. From what I hear from people who have bought their cars - nothing but junk. They can fold and it will not kill the economy. We have plenty of car manufactures in this country to make up the slack - biggest trouble - they are not American companies. They all moved out.
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