Ford Motor Company (F), General Motors Company (GM), And One Key Question: Are Subprime Loans Fueling Auto Sales?

Page 1 of 2

A new report suggests that the Dodge Avenger may be especially popular with subprime new-car buyers. Photo credit: Chrysler

New-car sales have come a long way since the dark days of the economic crisis. Sales in 2009 hit lows not seen since the early 1980s — but since then, things have picked up considerably. There are a lot of good reasons for that. The economy may not be booming, but more people are back to work, and more people are feeling confident that their jobs aren’t in danger.

Ford Motor Company (NYSE:F)

But lately, there have been a few signs popping up to suggest something worrisome. One of the drivers of new-car sales growth might be one of the factors that caused the economic crisis in the first place: subprime loans.

Car sales are up – and subprime lending may be, too
The worst year for sales in almost 30 years came in 2009, with only 10.4 million “light vehicles” (the industry’s term for cars, pickups, and SUVs) sold. That represented a huge drop from the 16-million plus that had been common in the years leading up to 2008’s banking crisis.

Sales aren’t back to those 16-million-plus levels yet, but they’ve rebounded nicely. Automakers sold a total of 14.5 million new cars and trucks in the U.S. last year. And they’re still improving: Most analysts expect sales to come in well over 15 million in 2013.

We know now, though, that a lot of the growth (not just in car sales) that we saw last decade was driven by subprime lending, the practice of making loans to people with poor credit ratings. Those loans were packaged into “asset-backed securities,” sort of like bonds, and sold to hungry investors.

A lot of those investments didn’t work out well, because a lot of those loans probably shouldn’t have been made in the first place. That practice dropped out of sight for a while, but lately it has started to surface once again — with car loans. That has some experts worried.

“White hot” demand for securities backed by subprime auto loans
A Reuters report earlier this month noted  that securities made from subprime auto loans were “white-hot” — and just as in the economic crisis, some concerns are being raised both about the quality of the loans and about the ratings on the securities.

Some issuers are going to “deep, deep subprime,” Reuters said — borrowers with FICO credit scores around 500. And demand for these kinds of securities could be fueling a push to make more loans to subprime car buyers. That, in turn, could be nudging new-car sales upward. And there’s some evidence that some automakers are benefiting more than others.

Page 1 of 2