Posted By
KIM KORTH AND TRACY SCHNEITER
on
7/23/2010 1:10 PM
Yesterday General Motors announced the purchase of AmeriCredit Corp. This will re-create a captive finance arm for GM and will allow them to get back into financing a much broader number of American consumers. Both GM and Chrysler have been severely restricted in their lending practices for the last year as they have had to rely on Ally Financial (the old GMAC) whose lending criteria are as stringent as that of a commercial bank. We were very excited when we heard this news as the ability to finance a broader range of consumers is a critical step in a return to normalcy for the automotive industry. So, imagine our surprise when we discovered that most of the press coverage and public opinion is overwhelmingly against the deal.
A typical comment was one posted by a subscriber to the Wall Street Journal who said, “GM is acquiring AmeriCredit so they can make loans to people who are otherwise unqualified for loans. This is on the taxpayers’ nickel. Where have we seen this story before?” This writer obviously hasn’t had notification that his credit card was revoked or been unable to qualify for bank or retail credit during the Great Recession. He and most of the other readers and pundits seem to be oblivious to how many good, pay-their-bills-on-time consumers have been shut out of the auto market for the last two years. We would argue that many of his neighbors, family members, co-workers, bosses, etc. are now falling into the “sub-prime” category. These are reasonable-risk consumers that have been completely unable to get a car loan.
The chart below shows the historical proportion of subprime borrowers running in the range of 13-15% of total new cars sold. The tightening of credit is reflected in the rising average FICO score in 2007 and 2008, and in the fact that the proportion of subprime is now about half of what it used to be. The really interesting fact is what lies beneath the 2010 subprime proportion of about 8%. This is the figure for all OEMs, but for GM, the proportion is about half that, or 4%. Because GM no longer has a captive finance arm, it is not able to go after that segment of the market the way other automakers are. If we taxpayers who own GM want to get good value for our investment, we should be demanding that they find a way to make a reasonable (not excessive) number of sales to this segment of the population. So IRN would like to be unequivocally on the record saying that the major OEMs’ return to owning captive finance arms is a good thing and absolutely critical to a sustainable recovery of this industry.
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