Car lending slashed as default threat rises among borrowers

[rickaren]

October 18 2008

Banks and finance companies in the US are aggressively cutting back on making car loans, as growing numbers of borrowers fall behind on their payments and lenders' access to funding is squeezed in the credit crunch.

Lenders such as Wells Fargo, Capital One and GMAC this week all reported heavy cuts to their auto lending businesses amid signs that borrowers are increasingly affected by the slowing US economy and rising unemployment.

Wells cut its $25bn auto loan portfolio by almost 25 per cent in the third quarter as it pulled back from making riskier loans, while Capital One cut back its volume of car loans by more than half.

GMAC, the GM lending unit now 51 per cent owned by Cerberus, the private equity group, tightened rules to issue loans only to high-quality borrowers. Dealers estimate 60 per cent of the customers who buy GM cars will not qualify for loans under the new rules.

The pullback from car loans comes as borrowers struggle to meet payments on their mortgages and, increasingly, on their credit cards. Citigroup this week reported that losses on its global credit card business rose 65 basis points to 7.05 per cent in the third quarter, close to record levels of 7.8 per cent reached in September 2005 prior to changes in the bankruptcy law.

Losses on auto loans have more than doubled in the last year, according to Fitch Ratings, as a rise in late payments has been compounded by falling prices for gasguzzling vehicles.

"Current economic conditions and volatile energy prices have led to softness in the wholesale vehicle market with noted declines in light truck and sport utility vehicle values," said analysts at Fitch.

Wells said higher losses on its auto loan portfolio were driven "primarily" by lower used car prices. Prices for large SUVs have declined 21 per cent from a year ago, according to the September Manheim index.

The credit crisis has also made it difficult for lenders to fund new loans.

A recent study by CNW Research shows that the number of approved auto loan applications in the US has declined since last year. Prime approvals fell 10.2 per cent, while for subprime borrowers the approval rate is down by 66.1 per cent.

Funding difficulties have also had consequences for the car companies. General Motors and Chrysler's sales of new cars have been hurt in recent weeks.

"These changes in pricing and underwriting are related to the current market environment, which has reduced access to funds and increased the cost of funds," GMAC said in a statement this week.

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