GMAC LLC, the big home and auto financing company, this week began restricting new loans to the most credit-worthy buyers after an attempt to raise new funds failed. The move threatens to crimp General Motors Corp.'s U.S. sales, forcing the struggling auto maker to push its potential buyers to other lenders.
Like GMAC, GM has struggled to raise $15 billion in cash amid a shutdown in the credit markets. The auto maker hopes to bring in $5 billion through asset sales and secured financing, but that effort has been stalled. Now, as its biggest source of revenue -- U.S. auto sales -- comes under additional pressure, the company is being forced to consider other measures, including exchanging its 49% stake in GMAC for Chrysler LLC.
Cerberus Capital Management LP, an investment group, controls Chrysler and GMAC, which it purchased from GM in 2006. GM is said by people close to the matter to have been interested in Chrysler in order to achieve $10 billion in cost savings, and to take control of Chrysler's multibillion-dollar cash reserves.
In the past, GMAC and GM have relied on one another for cash -- through dividends or other payments. But earlier this week, GMAC Chief Executive Officer Al de Molina signaled the taps may run dry. In a Monday email to employees, Mr. de Molina said the firm's mortgage and auto lending operations "have limited if any access to funding." By tightening its lending policies, GMAC hopes it can conserve cash. Bloomberg News reported earlier on the contents of the email.
GMAC is considering strategic initiatives for its profitable insurance operations and has recently launched a failed attempt to significantly downsize the assets in its commercial lending business.
The financing woes spilled into its operations this week as GMAC said it would only approve loans for low-risk customers with credit scores of at least 700. The median score of U.S. consumers is 720, according to Fair Isaac Corp., which helps companies manage credit risk. Scores range from 300 to 850. GMAC's move comes amid a wider tightening of standards among auto lenders, including J.P. Morgan Chase & Co. and Wells Fargo & Co.
GMAC's restrictions on borrowers add a new burden on GM at a time when concern is growing that the auto maker may not have enough cash to survive the economic downturn. Given GMAC's significant role in funding new vehicle purchases, the decision to limit lending could further crimp GM's sales, analysts say, and contribute to new revenue declines and market-share losses.
In the second quarter, 49% of new GM vehicles sold in the U.S. were financed by GMAC. That means a sizable chunk of buyers who would have received a GMAC loan are now forced to look elsewhere.
"A substantial number of customers walking into Chevrolet stores have scores under 700," Group1 Automotive Inc. Chief Executive Earl Hesterberg said, referring to GM's highest-volume brand.
Mr. Hesterberg, who runs the fourth-largest dealership chain in the U.S., said that while it is possible to get financing for people with credit scores under 700, "that would take time and many banks have also tightened credit."
GM plans to launch an initiative aimed at letting consumers know they can still obtain credit for a new GM car or truck. The initiative, designed to go public Friday, comes on the heels of several auto lenders -- including GMAC -- moving to tighten lending terms considerably in recent weeks.
GM's campaign, dubbed Financing that Fits, will show buyers that there are hundreds of banks, credit unions and other lenders still willing to give auto loans and leases, spokesman John McDonald said.
"This is not an issue of trying to drive business away from GMAC," Mr. McDonald said. "This is us trying to sell cars and trucks at rates people can afford."
Mr. McDonald, who read off a list of obscure credit unions participating in the program, in addition to better-known banks and lenders, acknowledged that buyers may not be doing business "with the lender you're used to."
AutoNation Inc. Chief Executive Officer Mike Jackson said GMAC's move is "disorienting." Many customers with scores between 600 and 700 have solid credit records, he said. GMAC is "walking away from good business," he said. "No one else has taken this position."
Mr. Jackson estimates 60% of his GM buyers are sub-700 credit-score buyers, although it varies by region. At AutoNation's Dallas and Fort Worth, Texas, stores, about three-quarters of the customers have scores under 700.
Joseph Amaturo, an analyst with Buckingham research, said that roughly 58% of U.S. consumers have a score of 700 or greater.
GM's struggles with GMAC come as auto sales around most of the world are slowing. In August and September, GM's sales fell in China. In September, the auto maker's sales in Europe slipped 8%.
Latin America, where GM currently runs its healthiest of four separate regional operations, is also expected to slow significantly in 2009, according to company executives.
This story posted by LeaseTrader.com, the automotive service company that lets people transfer out of their Car Leases early. If you're looking to swap a lease or transfer out of your car lease, please visit www.leasetrader.com