Posted By
KIM KORTH
on
7/27/2010 2:52 PM
A few days ago, I did a posting regarding our enthusiastic support of General Motors purchase of AmeriCredit finance. Our support was based on the importance of the subprime borrower to the automotive industry. In Friday’s New York Times, Joe Nocera wrote a terrific article entitled, “Credit Score is the Tyrant in Lending.” Here is a point from the beginning of his column:
“Essentially, a person’s credit score has become the only thing that matters anymore to the banks and other institutions that underwrite mortgages…To make matters worse... clients are having a difficult time just maintaining their current credit scores - even when they have done nothing to merit a downgrade.”
The quote is referencing the mortgage market, but the same problems hold true for access to automotive credit. While the article focuses on the inaccuracy of most credit scores in establishing credit worthiness and the “Rube Goldberg” way most credit scores are derived, the main message is that millions of perfectly worthy homebuyers (and auto owners) are being shut out of the market due to the ridiculously conservative approach financial institutions are taking to lending. Nocera relayed his conversation with a mortgage broker interviewed for the column as follows:
“Yes, she told me, she knew that underwriting standards had been way too lax during the bubble. But to her mind, the mortgage lenders had swung too far in the other direction, depriving perfectly creditworthy borrowers of the chance to get a mortgage at a reasonable rate.”
Our analysis on financing approaches in the automotive industry comes to the same conclusion. Hundreds of thousands of creditworthy consumers either can’t get a car loan or won’t take a car loan at the rates they are currently being offered. The only way is this is going to get better anytime soon is if the OEM has access to its own credit arm so it can use more reasonable lending standards. While there is some danger that they will start to lend to some people just to “move the metal” we are confident they learned their lesson from their own lending excesses of the past and this high-risk lending behavior is unlikely to repeat itself. Lending to worthy consumers that are currently rated as subprime is an essential step to a full automotive recovery.
1 Response
to "The Importance of Access to Credit - Part II"
RJP says:
I'm not sure promoting sub-prime lending is a good way to improve sales considering two of the largest OEMs were bankrupt just one year ago, taxes are set to rise, local governments are carrying huge debt, and unemployment is extremely high (by historical measures). One look at a chart of US Consumer Debt will remind us that consumer credit is a relatively new issue that is still out of control. This makes it very difficult to describe any current lending practice as "ridiculously conservative".
Posted: Wednesday, July 28, 2010 2:05:17 PM