Where's the outrage? I started this post days ago. I didn't finish it because it seemed so obvious everyone would write about it. Not true. So, here it is:
It's really hard to believe GM, now owned by the US Taxpayer, announced they're buying AmeriCredit. AmeriCredit, in case you were unaware, is a subprime lender. Once again, "New GM" has realized what old GM knew: The products they sell are too expensive for anyone to buy for cash, so they have to be sold on credit. Furthermore, no (sensible) lender will sell these products on credit, so they need their own lender.
Let's look at some detail here. Apparently many people like the Chevy Impala. (I'm not certain I've been in one since my Aunt Bonnie drove one in the late '70s, but that's a different issue...) According to Edmund's, in my region, a 2011 Chevy Impala LS will set you back $24,782. (That's the "market price" not invoice or sticker.) The real problem, however, lies in the 2010 price. The brand new 2010 Impala LS costs you $20,347. That's nearly 20% depreciation on a new car.
The same depreciation hits a used one. An "Outstanding" condition, "Certified Used", 2009 Impala with 10 miles on it sells for $16,628. On a trade-in, it's worth $12,526. That's basically half the price of a new one.
I know, tell you something you don't know. We're planting the seeds of our own disaster.
GM will use AmeriCredit to finance dealer inventory. They'll lose money on that transaction, unless the cars move very quickly, before they depreciate at the wholesale level because a 2010 car is worth 80% of a 2011 one.
The dealers hope to move the cars more quickly because AmeriCredit will finance the customers too. We'll be lending $24,282, (that's after a $500 down payment, because, if you hadn't heard, "taxes, titles, fees and registration are extra!") We may even lend that much at 0.9% for five years.
Everyone in America knows about loan-to-value ratios now. What's the LTV on an Impala? It can't be that bad, right? We learned our lesson with houses! We cannot possibly make high LTV loans to people with no ability to pay, deteriorating willingness to pay, and collateral that could fall in value dramatically, like houses, right? Well, that Impala, the second it's driven off the lot, has an LTV of nearly 2...and we probably won't collect any interest on the loan!!!
This makes financing condos in Vegas in late 2007 look smart.
We need a word that's not "loan" to describe how consumer credit works now. I was watching a CNN profile on loan modifications (which I'm in favor of generally) this morning, and the homeowner was describing how she was upside down on a loan, and needed a new appraisal at the lower price to get payments reduced. So we now have an instrument that, when the underlying asset is marked to market at a lower value, doesn't result in a requirement to post capital, but instead a lowering of the principal value? I guess we've decided to redefine consumer debt as some odd form of equity now?
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