Delinquencies and housing-fueled credit crunch may rack retail car sellers

Tuesday, December 18, 2007

Financial experts say hints of an approaching recession may be further spurred by a spike in the number of delinquent car loans being reported by auto lenders and the Wall Street firms that fund tradeable securities based on the loans.

A recent Lehman Bros. survey suggests growing delinquencies in subprime auto loans may be the harbinger of decreased consumer spending in 2008, a decline in automotive sales, tightening in credit availability and could result in as many as 15 percent of consumers being unable to close on a vehicle next year.

Former Nevada Mortgage Lending Commissioner Scott Bice, now a high-ranking Town & Country banking official in Las Vegas , said that now is a troubled time for all credit-related industries because of the effects of the subprime home loan crisis.

"Generally this is the trend of things with the economy being what it is," he said.

Stories of fraudulent lending practices during the housing boom are widespread. Fraud could also be at the center of a potential crash in the retail auto industry, particularly as it relates to used cars.

The National Automotive Finance Association denies that the delinquencies have risen to the level of a crisis. In literature sent to members in a Fall 2007 newsletter, the organization asserts that although the industry is weaker than it was a year ago it is still strong enough to survive. However, the largest auto-industry lenders are shielding themselves from losses.

Ford Motor Credit Co. and GMAC Financial Services showed some higher delinquency rates for October and September compared with recent years, the Detroit Free Press reported in November. In response, GMAC spokeswoman Gina Proia said it is cutting back on its riskiest loans and increasing its collection force.

Ford Credit and GMAC both say high-risk loans are a small part of their businesses. Earlier this year, General Motors Corp. reported a $39 billion loss, mostly due to an accounting charge, but officials admitted some of it was prompted by a record loss at its GMAC unit.

One consumer group, Public Citizen, says fraudulent lending practices are leading to an abnormal glut in auto loan defaults.

The defaults are causing dealerships to make up the losses by putting consumers who have good credit into subprime loans, says Duane Overholt, an anti-fraud consultant, who contends the practice may result in self-fulfilling economic calamity.

"The effects here will be 10 times higher than the subprime mortgage crisis," he said. "They're going to destroy themselves and destroy the economy in the process."

Subprime borrowers constitute about 7.7 percent of the new-car-buying population for the industry and 80 percent of new cars were purchased on loans or leases, the Lehman report shows.

Two of the key sources of credit for auto consumers, installment lending from banks and home equity credit mortgage refinancing, appear to be tightening, which would likely crimp sales, the report shows.

Overholt said the crisis has only started.

The consultant provided the Las Vegas Business Press with industry documents that appear to support allegations of collusion between lenders and auto dealers, but which could also constitute isolated instances. None of the documents referred to Southern Nevada businesses.

One whistle blower says bad lending practices are rampant.

"There's a lot of pressure to keep that money flowing," said Richard Van Heel, of Tulsa , Okla. , an industry whistle blower who is suing his former employer, Sonic Automotive Inc., for deceptive practices.

The major difference between the home loan crisis and a potential car loan crunch is that houses have the possibility of regaining value. Cars, on the other hand, depreciate day by day and hardly ever recover their value.

The Lehman report noted that 19 percent of borrowers in a recent financing survey left the showroom with loans more than 12 percent higher than the value of the car, which exceeds the range needed to absorb incidental costs and taxes. The report suggested the practice smacked of dealers rolling old loan balances into the price of the car to cover both.

By contrast, traditional banks insist on a down payment and under 80 percent loan-to-value ratios, the report shows

More than 16.5 million new cars and light trucks were sold in 2006, reports the National Automobile Dealers Association, which publishes a comprehensive annual analysis.

More than 19 million used cars were sold last year.

Source : http://www.lvbusinesspress.com/