Eric Dash published an article today called “Auto Industry Feels The Pain of Tight Credit”
Mortgaging the House to Buy a Car
I was a little slow: How could housing starts and mortgage credit adversely affect the purchase of a new car?
Well, dummy, I said to myself, both credit markets must rebound off each other. If there isn’t enough money in the Housing Market, it could take away from the flexibility in auto financing.
That was the right answer, but there’s more. Dash’s article pointed to the fact that soaring fuel prices were taking their toll on truck drivers. Almost everything in America is shipped by truck. So, naturally, that will increase the cost of goods you order that must be transported by trucks.
Back to the main question: Dash said, “Auto lenders and banks, closing their wallets, have prevented hundreds of thousands of consumers from obtaining the financing for a car.”
Now, this was news to me. We just spent an entire day looking for a car for our daughter. We finally found it and she bought the car on zero percent interest. It was a foreign car, Toyota, if that has anything to do with the financing bonanza we hit onto.
The experts tell us that home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers. Our daughter had good credit–and she put down a hefty amount–so she had no trouble. But what if she were trying to do a home equity loan and to use the proceeds of that loan to buy the car? Apparently, today it doesn’t work too well–all due to the subprime housing recession we find ourselves embroiled with.
And used-car prices have fallen nearly 6 percent as repossessed cars and gas-guzzling trucks and S.U.V.’s flood auction lots.
Those forces, on top of the softening economy, are putting enormous pressure on the American auto industry as it faces what may be its worst year in more than a decade. About 15 million vehicles are expected to be sold in 2008, down from 16.2 million last year, as sales reach the lowest levels since 1995, according to the marketing firm J. D. Power & Associates.
The impact on the broader American economy could be profound. Not only is the car a consumer’s biggest purchase after the home, but the auto industry remains one of nation’s most important economic engines. With less money available to bolster the industry’s growth, the businesses that support it are also facing the prospect of a sharp slowdown.
“It is a bleak picture, and it all hinges on the availability of financing,” said William Ryan, a financial analyst at Portales Partners who has followed the auto business for years. “The whole universe related to the auto industry is touched in some way — parts suppliers, manufacturers, salespeople, trucking people, the paint and metals industries. Even semiconductors.”
Within the auto sector, problems stemming from the continuing tightening of credit have already started to spread. Auto lenders like Chase, Capital One and GMAC are finding it harder and more expensive to obtain money for loans. Profits also look dimmer as the lenders absorb losses from defaults and pull back from making new loans.
Car dealers and manufacturers will probably face months of weaker profits as they offer more incentives to sell new vehicles. Luxury car sales, which provide outsize profits for auto companies, are off 13 percent from last year, according to the Autodata research firm. And consumers, facing potentially higher mortgage payments and $4-a-gallon gas, are delaying purchases of midmarket cars.
“The housing crisis, defined with the credit crisis, has really knocked consumers back on their heels,” said Michael J. Jackson, the chairman of AutoNation, the largest automobile retailer.
But the auto industry may not suffer the same severe downturn as the housing sector. One reason is that auto lenders have long issued loans expecting that vehicles, as collateral for the loans, start to lose value as soon as they are driven off the lot. In contrast, mortgage lenders during the housing boom believed that home prices would keep rising.
Still, the parallels are striking. Easy money and lax underwriting helped extend a boom for automakers from 2005 to early 2007. With Detroit pumping out new cars, consumers were encouraged to buy even though they might not have needed a new vehicle.
Now, just as in the housing sector, the auto industry is suffering, too.
Borrowers are falling behind on their car payments at a rate faster than in other recent downturns. And losses are considerably worse. Auto lenders sustained losses on about 3.4 percent of their loans in the first quarter, a rate about 30 percent higher than in 2002, according to data from Moody’s Economy.com. Even some of the most creditworthy borrowers are stressed.
Recently there have been a few small signs of improvement. But auto lenders have struggled to find investors willing to buy packages of new loans. Just as in the mortgage markets, a sterling credit rating — the bond insurer’s seal of approval — is no longer trusted.
“It’s a challenge, but it’s not a crisis,” said William F. Muir, president of GMAC, the financing arm of General Motors that is now operated as a joint venture.
As the pool of money available to auto lenders has dried up, they have cut back on making new loans. Since late last year, nearly every auto finance company has tightened its lending standards. They are forcing borrowers to put more money down. They are also demanding higher monthly payments and requiring stronger credit records and more stringent documentation.
Subprime auto lenders have been forced to pull back the most. AmeriCredit, a big subprime finance company, said it would issue about $3 billion in new auto loans this year, compared with $9.2 billion in 2007. That translates into around 340,000 fewer vehicles being financed this year. But lenders catering to less risky borrowers are also retrenching.
“Capital One is pulling back, Citi is pulling back, HSBC and Wells Fargo are pulling back,” said Mr. Ryan, the analyst. So are the finance entities that serve the major automakers, like GMAC, Chrysler Financial and Ford Motor Credit. “What you are seeing at AmeriCredit is probably happening everywhere else, but probably to a lesser degree.”