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Lending drives rebound in sales of new cars

Loans are now easier to obtain

By Eric Dash
New York Times / February 28, 2011

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NEW YORK — Detroit is crowing that the auto industry is back, but so far, at least, it is a success story built as much on a revival in lending as on the development of desirable cars.

Sales of new cars rose 11 percent, to around 11.4 million, in 2010 and are off to an even stronger start this year, according to Autodata, an industry research service. Sales of used cars have been similarly robust.

After radically scaling back auto lending during the financial crisis, banks and the lending arms of the automakers have started to issue loans more aggressively. Borrowers of all types are finding it much easier to obtain a loan, compared with a few months ago.

Even car buyers with tarnished credit histories are getting financing, in some cases without making a down payment. More than 859,000 new cars were sold to consumers with a so-called subprime credit rating in 2010, a nearly 60 percent increase from the year before, according to CNW Marketing Research.

The revival of auto lending is emblematic of an increased appetite for risk in the American economy. Consumers, showing renewed confidence in the recovery, are opening their wallets again after putting off car purchases during the recession.

Banks, flush with deposits to lend out, have eased their standards for extending credit. And investors, who fled from the bond market during the throes of the crisis, are starting to snap up higher-risk debt as they seek higher yields.

Wall Street’s loan packaging business has again become a crucial engine for supplying money to auto and credit card lenders, and it is happening much faster than most economists had predicted.

Nobody is suggesting an imminent return to the heady, reckless days of the housing boom, and any one of a number of factors — including the recent surge in oil and commodities prices — could set the recovery off track. But the gradual expansion of credit in virtually every area except real estate is an important sign the US economy is returning to health.

The rebound in auto lending has been especially pronounced. Indeed, Michael E. Maroone, the president of AutoNation, which has a coast-to-coast network of more than 200 dealerships, called it the single biggest factor spurring the sharp increase in car sales last year.

“We had people coming to our showrooms that wanted to buy, but we couldn’t get them financed,’’ Maroone said. “We are now getting them the financing.’’

For the auto industry, the surge in sales represents a remarkable reversal.

Only two years ago, the Big Three automakers were in such dire condition that they received more than $87 billion in federal aid; Chrysler and General Motors required Chapter 11 bankruptcy protection.

The Obama administration provided other assistance. It engineered the rescues of CIT Group, a major lender to auto dealerships and parts suppliers, and bailed out the auto finance companies Chrysler Financial and GMAC (now known as Ally Financial).

Just as crucial, economists say, was the administration’s effort to lure private investors back into what was once a $100 billion-a-year bond market for auto finance companies, according to Deutsche Bank Securities. That market had all but dried up by the end of 2008. The federal program provided more than $11.7 billion in below-market financing to private investors to encourage them to resume purchasing bonds backed by auto loans.

Although the amount of government financing was relatively small, it accomplished its goal: to revive the market for packaged consumer loans and get credit flowing again, especially to weaker borrowers. That market stood at $36 billion in 2008 but by 2010 had bounced back to almost $58 billion.

Several factors contributed to the recovery. Banks and auto lenders can reap large profits on new loans, since interest rates near zero have kept the cost of their funds low. Auto lending was also largely unaffected by new regulations that limit bank fees. And auto lenders, unlike home lenders, expect vehicles to lose value quickly. That helped them avoid the costly mistakes of mortgage lenders, who underwrote loans on the belief home prices would keep going up.