Sorry!! The article you are trying to read is not available now.
HOT TAGS:  

Ally Financial Hopes Investors Won't Realize "Nonprime" is Same as "Subprime"

Print comment Post Comments
WE'RE NOT THAT STOOPID
DailyFeed
Boy, it feels like just two years ago that the Associated Press wrote that "the banking arm of ailing auto finance company GMAC is taking on a new name, hoping to smooth its image and entice new customers."

In fact, GMAC became Ally exactly two years ago -- if "becoming" is defined as "nothing more than changing business cards and letterheads."

Now, Ally is putting its chips down on what helped take down the lender in the first place -- subprime loans.

But this time it's different, people. Just like Ally "isn't" GMAC, an Ally spokesman insists that its not making subprime loans, it's making "nonprime" loans.

"We accept retail auto contracts through the full credit spectrum -- including nonprime -- as a normal part of our business," Ally's James Olecki tells David Henry of Reuters. "We place greater emphasis on the higher end of the nonprime spectrum and we only approve credit for qualified customers who demonstrate the ability to pay."

Henry writes:

The company is making more loans to subprime borrowers, and financing more purchases of used cars, both steps with higher risk. It has said it wants to raise the percentage of auto loans on used cars that it makes to 50 percent from its current 20 percent.

That may sound like a great plan now, but similar arguments about subprime mortgages were common in 2003, analysts said.

And, Ally and its competitors may follow the pattern of past credit cycles, where lenders make increasingly risky loans at lower interest rates until waves of defaults and losses swamp them. Loans that seem safe can sour quickly.

Some banks, including JPMorgan, are already tapping the brakes on auto loans because profit margins have become too slim given the risk.

So, what does Ally know that JPMorgan doesn't?

Oh, maybe that people seem willing to give up their homes before they'd give up their wheels.

"A lot of consumers chose to default on their mortgage, but remain current on their car loan," says analyst Kirk Ludtke of CRT Capital LLC.

Or perhaps GMAC, er, Ally, thinks the US government won't remember that it bailed the company out three times for a total of $17 billion as the subprime mortgage market collapsed.

That
wasn't Ally -- it was GMAC. And those were subprime mortgages, not nonprime car loans.

Besides,
Bob Ghent, owner of Ghent Chevrolet and Cadillac in Greeley, Colorado, says Ally is "being more careful" than it had been in the past -- though it's anyone's guess how long that might last.

"When they want business, they will lower their standards," Ghent told Reuters' Henry. "That's just competition."
POSITION:  No positions in stocks mentioned.

TICKERS