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GMAC gets a government boost

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.

Reader Comments

W. P. Ryan

December 31, 2008 2:48 PM

Interesting. May I now assume the pending proposal for "bank" status for GMAC is dead?


January 1, 2009 2:54 AM

well gm will always be my way of buying a car plus tey have loyal customers but the service managers need to be paid more they deal with so many bad attitude people . you should think of your managers and mechanics just like they pay every one who can hit a d!!!ball in a hole are throw one for millions if uyou want this company to pull out of this slump stop being mr scruged and have 13 jets and you will come back people are really watching this company now chevy still the best car stop trying to make them look like a car that is no where say camaro for instant every one loved that car i see some cars i think oh that for instan lexus looks like a volswagon bring in some real people designers lol anyway gm stop taking all the money god watching bring money down to managers and mechanixs thank you wake up gm what happen to family no xmas this year for my family not even tree barely made a house payment but who cares .


January 1, 2009 8:58 AM

Why is irresponsible lending to credit unworthy people a good thing? First the saves GMAC and it turns around and uses these $s to wite bad loans and we are supposed to appreciate this. If the only way to sell GM crap is to sell it to those who cant afford it then let it fail.


January 5, 2009 6:18 PM

So now lending money to people who can't really afford it is supposed to help the economy? What a wicked web we weave!


May 23, 2009 9:48 AM

What is the status of GMAAC bonds? I have one coming due in August and others in December. I hope that this news should improve the fininacial securrity of these bonds.


December 30, 2009 3:57 PM

If you believe that govt can prevent failure and get you return on investment at the same time then invest in GMAC otherwise get out ASAP and should have been out of it since Sep meltdown.

I believe it's going to fail or will survive with no real returns in next 5 yrs.

Good luck

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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