General Motors has the highest auto loan delinquency rate in the industry due to its increasing reliance on subprime customers, a fact some experts fear could lead to a bubble like the one that wrecked the housing market in 2007 and produced the Great Recession of 2008.
At the same time, however, JD Power, one of the auto industry's most respected forecasters, sees 2013 sales headed to 15.3 million units, the highest level in years.
"High production costs and falling profit-per-car have led auto manufacturers to turn to financing to earn higher profits. Automakers have capitalized on lending by not only loaning money to customers but also packaging and selling those loans to investors in a manner similar to the sale of mortgage-backed securities that created the housing bubble," according to the Washington Free Beacon's Bill McMorris.
"The dramatic increase in securitization has coincided with GM's acquisition of AmeriCredit, one of the nation's largest subprime auto lenders, which it renamed GM Financial (GMF)," McMorris said.
John Berlau of the Competitive Enterprise Institute, a Washington think tank, and Ed Niedermeyer, a veteran automotive industry analyst, told McMorris they see multiple worrisome signs on the horizon.
"It's becoming Fannie Motors," Berlau told McMorris, referring to the government-backed housing lender Fannie Mae. "They're still using our tax dollars to break into exotic and money-losing propositions from Chevy Volts to subprime loans, both of which could literally and figuratively blow up in their faces."
McMorris said as many as 85 percent of GMF's current auto loans are categorized as subprime. Through the end of 2012, 8.5 percent of GM's car loans were in delinquency, "the highest rate since 2010 and larger than the delinquency rates at Ford, Toyota, and Honda combined," McMorris said.
Niedermeyer told McMorris that auto industry fundamentals remain weak and that is a big factor in the surge of subprime loans.
“Securitization is happening everywhere in the industry,” Niedermeyer said, according to McMorris. “They have to be greedy because the fundamentals of the car business are not sound. If the fundamentals were sound, they could profit like everyone else is.”
An estimated 96 percent of GM's portfolio of auto loans are to customers with credit scores below 660, the subprime threshold, and that parallels lending trends seen in the housing industry in the years prior to the 2007 crash and the 2008 recession, according to Niedermeyer.
“There’s no doubt that all the makings of the bubble are here; risk is up subprime is up and this bubble has to exist for GM to look like a viable car company,” he told McMorris.
Meanwhile, February sales were strong, according to JD Power, which noted that "total light-vehicle sales in February 2013 are projected to reach 1,176,200 units, a seven percent increase from February 2012 and the fourth consecutive month with the selling rate at or above 15.2 million units."
Approximately one in five of all sales were to fleet purchasers, according to JD Power.
JD Power expects 931,100 vehicles to be sold in February for a Seasonally Adjusted Annualized Rate (SAAR) of 12.1 million units.
That would represent a decline from January's 13.1 million unit SAAR, but considerably better than February 2012's 11.7 million SAAR, according to JD Power, which considers retail transactions as the most accurate measurement of true underlying consumer demand for new vehicles.
"All signs of the industry's health are positive right now," said John Humphrey, senior vice president of the global automotive practice at J.D. Power and Associates. "Average transaction prices are up, incentives are stable, leasing is at a healthy level and newly redesigned models continue to make an impact on the marketplace."
For more from McMorris, go here. For more from JD Power, go here.
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