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Analysts worry that mortgage troubles could spread to auto loans

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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 payments.

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 big-ticket items.

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 earnings presentation.

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 said.

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.

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Analysts worry that mortgage troubles could spread to auto loans
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