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Economy drives up car loan defaults

From The Detroit Insider:

Economy drives up car loan defaults
As lenders tighten credit rules, automakers fear fewer buyers will qualify for financing.

Christine Tierney / The Detroit News

With the economy sputtering and homeowners facing higher mortgage payments, many consumers are struggling to keep up with their car loans, too.

Auto and bank executives say delinquencies and defaults are creeping higher because of worsening economic conditions, rising unemployment and higher costs -- including gas and food prices.

Although delinquencies -- defined as payments that are more than 30 days late -- haven't risen to the alarming rates roiling the U.S. housing markets, they have increased enough to prompt lenders to tighten their standards.

That's bad news for automakers. If banks and other lenders turn away prospective car buyers with weak credit scores, that could make a difficult year for automakers even harder, particularly for Detroit's Big Three.

"I'd think your Chevys and Fords and Chryslers -- those are the brands likely to get hurt," said Bradley Rubin, an analyst at BNP Paribas in New York. "It's a subject that hasn't been discussed that much by the managements of GM or Ford up to this point."

General Motors Corp. and Toyota Motor Corp. expect car sales this year to be flat, compared with the 2007 total of 16.1 million cars and trucks. But some auto executives and analysts worry that sales could fall substantially.

In December, Lehman Brothers auto analyst Brian Johnson lowered his 2008 U.S. sales estimate to 15.5 million vehicles from 16.2 million, citing, among other factors, "a consumer credit crunch which would leave about 10 to 15 percent of buyers unable to close on their desired vehicle."

Auto and bank executives say delinquencies in auto loan payments are up across the board, with some luxury car buyers falling behind along with struggling subprime borrowers. But they stress that the situation in no way resembles the mortgage crisis.

Car loans, they say, are very different from home loans. Rates on car loans are fixed, so payments don't change from one month to the next the way adjustable mortgages do.

Secondly, lenders tend to screen auto loan applicants more carefully. That's because, unlike homes which appreciate in value and stay put, cars depreciate and can disappear.

Troubling signs
Still, the evidence is mounting that many car buyers are in too deep.
The latest data from the American Bankers Association showed the delinquency rate for indirect auto loans, typically arranged by dealers for their customers, rose in the third quarter to 2.86 percent, a 16-year high.
"The trend raises the yellow caution flag," said James Chesson, the association's chief economist. "With the economy slowing, banks will be more conservative in their approach to new auto loans."

Highly rated borrowers are falling behind, too. In December, 2.09 percent of prime auto loans rated by Standard & Poor's in 2006 were more than 30 days past due, up from 1.85 percent for loans made a year earlier, and above the historical highs of 2001.

"There's a lot of talk about subprime, but prime customers are being impacted as well," said Kerry Rivera, a spokeswoman for Toyota Financial Services. "We're seeing customers across all tiers having some struggles."

Toyota Financial Services, GMAC Financial Services, Ford Motor Credit and other so-called "captive" firms owned or partly-owned by automakers report that delinquencies have risen, but not to worrying levels.

Ford Motor Credit said vehicles on which loans were 60 days or more past due made up 0.23 percent of its loan and lease business in the fourth quarter, up from 0.17 percent a year earlier.

GMAC, 51 percent owned by Cerberus Capital Management LP, is expected to offer an update on the situation Tuesday when it reports its 2007 results.
So far, the captive firms, which provide around half of the loans for new car sales and rely on Wall Street for financing, have not signaled that they will loosen their standards to make up for the credit tightening under way at some banks and subprime lenders.

Mitsubishi Motors Corp.'s near-meltdown in the U.S. market in 2003 serves as a cautionary tale for automakers tempted to boost sales with too-easy credit.

"The challenge in 2008," Rubin said, "is, can they hold that discipline in a shrinking market? Will they sell to people who shouldn't be buying cars? It'll be difficult."

Strapped consumers
Ford Motor Co.'s market analyst George Pipas says the automaker's 2008 U.S. sales forecast for 15.7 million cars and trucks does take the chillier lending climate into account.

But that's not the main issue, he said. "It's the slower economy and slower rate of income growth -- that's the issue, and that gives rise to concerns about credit."

In some cases, dealers are averting defaults by putting customers into less expensive vehicles with smaller monthly payments.
Dale Koelzer of Fox Automotive in Rochester Hills recently exchanged a customer's VW Touareg SUV for a used Toyota Corolla to cut the monthly payments to $250 from around $600. "A lot of people with flex-rate mortgages can anticipate they're going to have trouble," Koelzer said.

Recent interest rate cuts from the Federal Reserve may offer some breathing room to borrowers stretching to meet adjustable mortgage or credit-card payments, and allow them to stay up-to-date on their car loans.

But the cuts take months to flow through the banking system and prompt increased lending.

Some lenders who focus mainly on subprime borrowers with shaky or thin credit histories have announced plans to scale back their lending this year.
One such company, AmeriCredit Corp. of Fort Worth, Texas, plans to reduce auto loans to between $6.5 billion and $7 billion for the year ending June 30, down from $10 billion initially projected and $8 billion in the previous year.

AmeriCredit, which lost $19 million in the October to December quarter, said the percentage of borrowers who were 31 to 60 days late on their payments rose sharply in December, to 6.8 percent from 5.5 percent for the previous quarter that ended Sept. 30.

"Everyone seemed to be having trouble," renters as much as subprime mortgage holders, AmeriCredit spokesman John Hoffmann said.

"We saw weakness across the board. Consumers are pretty stretched right now."
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