Rising delinquency rates on car and truck loans have
some industry analysts concerned that subprime mortgage troubles
could spill into the U.S. automotive finance business.
In a note to investors Monday, Lehman Brothers analyst Brian
Johnson said his analysis of auto loan-backed securities sold by
Ford Motor Credit Co. (NYSE:F) and GMAC Financial Services (NYSE:GM)
showed some higher delinquency rates for October and September
compared with recent years.
``As unemployment remains low, this deterioration in the auto ABS
credit conditions may be evidence of a likely spill over of the
mortgage woes onto the auto credit world,'' Johnson wrote.
Spokeswomen for both Ford Motor Credit and GMAC said they
experienced slight increases in delinquencies in the third quarter,
but those were unrelated to the subprime mortgage problems.
Subprime mortgages are home loans to borrowers with tainted
credit histories. Such loans caused credit markets to seize up in
August on concerns about plunging home prices and missed mortgage
Nearly 2.3 million subprime mortgages are projected to reset at
higher rates, and correspondingly higher monthly payments, through
the end of next year. Many fear those loans will result in
foreclosures that will drag down property values.
With the housing market continuing to sink, investors are bracing
for more writedowns at financial institutions, which have already
written down tens of billions of dollars this year.
This month, major banks including Citigroup Inc., Merrill Lynch &
Co and Morgan Stanley have revealed massive losses on investments
linked to the U.S. mortgage market.
John Casesa, managing partner for the Casesa Shapiro Group, an
auto industry financial advisory firm, said there's no question that
the mortgage woes will spill into car and truck financing.
``The only question is how big a worry it is,'' he said.
If the spill over continues, it could further drive down auto
sales, Casesa said, because as adjustable rate mortgages go higher,
there will be less liquidity available to buy cars and other
Loan delinquencies could also result in tighter credit by the
auto companies' financial units, Johnson wrote.
``The weak performance of the recent issues may lead the captive
finance companies to follow the lead of some banks and tighten
underwriting guidelines,'' he wrote.
But GMAC spokeswoman Gina Proia and Ford Credit spokeswoman
Brenda Hines each said that while delinquencies rose slightly in the
third quarter, which is normal for that time period.
Also, subprime borrowers are only a small part of much larger
portfolios, they said.
``About five per cent of our total portfolio would be considered
high risk or nonprime. That's a very small part of our business,''
Hines said, adding that delinquencies at Ford Credit are at historic
lows. ``We are not concerned about our portfolio at this time. In
fact, our portfolio continues to perform very well.''
Johnson was looking at selected asset-backed securities from GMAC
and not its whole portfolio, Proia said.
But GMAC, the former finance arm of General Motors Corp. that is
now 51 per cent owned by Cerberus Capital Management LP, reported a
small rise in above 30-day delinquencies in its third quarter
Proia said credit losses in the auto business remain stable.
``We know that we employ sound underwriting practices and we're
closely monitoring the portfolio,'' she said.
Tighter credit, rising fuel prices and increased mortgage costs
could spell trouble for the auto industry in 2008, several analysts
Casesa is predicting 16 million U.S. light vehicle sales this
year, dropping to 15.9 million next year, 1.4 million below peak
sales of 17.3 million in 2000.