Posted by: David Welch on December 31, 2008
Now here’s a government bailout that could achieve some results pretty quickly. The Federal Reserve bought a $5 billion stake in the lender GMAC Financial Services, the lending arm of General Motors, and loaned it another $1 billion. GM responded by immediately offering 0% financing and dropped its underwriting standards to give loans to non-prime borrowers.
This could help GM pretty quickly. Unlike some of the big banks and financial institutions who haven’t opened up the checkbooks despite government aid, GMAC is moving quickly to write loans. Tighter lending standards from GMAC is one factor that has hurt sales. Through November, GM sales sank 22% while the whole car market dropped 16%. Consumer confidence, or a frightening lack of it, is partly to blame. But so is the credit crunch.
See, GMAC’s credit rating has long since fallen into junk. That has made it tough for the lender to raise new cash to write new loans. Plus, the market for asset-backed securities—loans bundled up and sold to investors—has also frozen up. Just a couple of months ago, one GMAC board member told me that the reason the lender had restricted lending to only borrowers with top credit scores was a lack of funds. GMAC only had enough cash available to loan to its dealers, who use the money to buy cars from GM, and top borrowers. Now, the company can write more loans. Just yesterday, GMAC said it would now approve loans for borrowers with credit scores of 621 or higher. Before, the company was only lending to borrowers with sores above 700, which is considered prime.
But don’t expect this to pull GM out of its very deep ditch. GMAC financed about 35% of GM buyers, according to Bloomberg. Since GMAC’s credit standards excluded about 42% of consumers, that means the tighter lending standards cut off about 15% of potential GM car buyers. Of course, some of them may have gotten loans from other banks or credit unions. So this won’t turn everything around. But it should get some car buyers driving off in new GM cars. And at this point, anything can help.