Fannie Motors

GM’s securitization of subprime auto loans could create auto bubble

February 22, 2013

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.

Heinke did not respond to additional questions submitted via email by the Washington Free Beacon.

"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.

"There’s no doubt that all the makings of the bubble are here; risk is up subprime is up and this bubble has to exist for GM to look like a viable car company," he said.

One Wall Street insider disagreed, pointing out that the long-term nature of the market is better able to react to trouble in auto securities that mature within a couple of years, rather than the mortgage industry’s long-term lifespan.

"Default on subprime stuff is pretty nasty, but I don't know if it’s a bubble in terms of credit quality," the source said.

GM finished the year with 8.5 percent of loans in delinquency, the highest rate since 2010 and larger than the delinquency rates at Ford, Toyota, and Honda combined.

The numbers failed to provoke the calls for oversight that accompanied the collapse of the mortgage industry. President Barack Obama exempted subprime auto loans from the authority of lending watchdogs at the Consumer Financial Protection Bureau.

Niedermeyer is worried that GM’s competitors will follow the path down subprime if GM is able to continue its lending practices with little oversight, though he adds that the U.S. is "still years away from a 2008 scenario."

"Bubbles take on a life of their own," he said. "GM’s risky behavior and the government’s willingness to look the other way threaten the larger economic picture."