This past week the Treasury used $5 billion of funds from the Troubled Asset Relief Program (TARP) to purchase senior preferred equity in GMAC, the financing arm of General Motors.  GMAC reacted immediately to deploy the funds by lending to new car buyers with credit scores as low as 621.

According to GMAC President Bill Muir, “We got the TARP money yesterday and today we’re out in the marketplace offering it to consumers”.

AutoNation Chief Operating Officer Michael Maroone was equally elated noting that “We want to get out there and let people know that we can get them credit now.  There are plenty of people with credit scores in the 600’s who want to buy cars”.

GMAC was masterful in showing its appreciation for taxpayer dollars by its quick lending, thus avoiding the criticism the banks received for not lending out their TARP funds.  The Treasury will, no doubt, show its appreciation by supplying GMAC with billions more as soon as possible.

The Treasury should reflect on the following points before advancing GMAC additional funds.

• A credit score in the low 600’s is sub prime.  You earn such a score by paying late and taking on obligations in excess of your ability to repay.  A low 600 credit score reflects a financially stressed consumer, typically with little in the way of savings and in need of constant new credit to pay off old credit.   Any consumer in this category should think twice about buying an expensive new car.  What they should really be doing is trying to save some money, pay down some debt and visit the used car lot.
• The free market was not providing car loans to sub prime borrowers for the reasons listed above.  The TARP fund is essentially subsidizing car loans, at taxpayer expense, so that customers who couldn’t buy a new car based on their low income or credit score, can now do so.
• AutoNation’s Mr Maroone is certainly correct when he states that there are plenty of sub prime borrowers eager for loans.  I doubt very much that Mr Maroone would personally lend money to a sub prime borrower because he knows better.  Lending taxpayer bailout money, on the other hand, is apparently a great idea.   Have we already forgotten the results of lending to sub prime mortgage borrowers?

If the government really wants to get the lending machines running again, they now know where to go especially since GMAC also makes mortgage loans through its ResCap subsidiary.  Here are the results of GMAC’s mortgage operation:

GMAC mortgage lender’s future in doubt

courtesy of Reuters

The Residential Capital LLC affiliate of automaker General Motors Corp (GM.N) may soon join the ranks of U.S. mortgage lenders that failed to navigate the deepening housing crisis.

The specter of a ResCap failure grew after parent GMAC LLC on Wednesday said “substantial doubt exists regarding ResCap’s ability to continue as a going concern” absent more support from GMAC, best known for lending to GM customers.

Christopher Wolfe, an analyst at Fitch Ratings, added: “If GMAC can’t provide support that ResCap needs, then bankruptcy is an option for ResCap.”

The lender has lost $9.1 billion in the last two years, and said that as of September 30 it wasn’t receiving interest payments on 21.8 percent of loans, up from 5 percent a year earlier.

“We can only describe credit quality trends as ugly,” CreditSights Inc analyst Richard Hofmann wrote.

“With equity down to $2.3 billion, clearly ResCap cannot survive much longer at its current quarterly loss rate,” he added. “Absent of any government support, we believe GMAC’s statement points toward the filing of ResCap for bankruptcy.”

Conclusion

Lending more money to those least able to repay guarantees financial losses on a colossal scale.   In the very short term, Government subsidized lending may give the economy a modest boost.  In the long term, such reckless lending will result in the insolvency of our nation.