Fed Program to Aid Auto Lenders Takes Effect This Month

The Federal Reserve may provide some additional, critically needed aid for auto lenders starting this month, from the so-called Term Asset-Backed Securities Loan Facility, or TALF.

The U.S. Treasury already provided Chrysler and GM with a total of $17.4 billion in loans and investments from the TARP, or Troubled Asset Relief Program, plus a combined $7.5 billion for Chrysler Financial and GMAC Financial Services.

The TALF is aimed at reviving the market for asset-backed securities, one of the auto industry’s workhorse methods of raising cash to make new auto loans.

“To run the auto industry without credit is like trying to run an airline without jet fuel,” said Mike Jackson, CEO of AutoNation, the biggest auto dealer chain in the United States. “It’s a $30,000 item. Without credit, you cannot put consumers in the vehicle,” he said at an industry conference sponsored by J.D. Power and Associates.

Jackson said that in December of 2007, GMAC financed 1,527 cars and trucks in AutoNation dealerships, versus only nine in December 2008. “Nine!” Jackson said, shaking his head. Customers turned down by GMAC had to get financing from another lender, pay cash or go someplace else.

Instead of General Motors Acceptance Corp., Jackson said at the Jan. 23 conference that GMAC should be called, “General Motors Rejection Corp.” Since government bailout money started arriving in late December and early January, there are some indications that credit has started to rebound.

The Fed says that the TALF, which was created in November 2008, should also help. The TALF is expected to start buying asset-backed securities this month from several sources, including auto loans, student loans, credit-card loans, and Small Business Administration loans.

According to Barclays Capital, the amount of newly issued auto asset-backed securities fell 80 percent in the second half of 2008, to only $6.1 billion, versus $30.5 billion in the year-ago period.

The way asset-backed securities work is the auto lender sells the income stream from a bundle of auto loans and uses the proceeds to originate new retail loans. In effect, the investors who buy the asset-backed securities collect the auto loans as they are repaid.

There are benefits to both sides. Instead of waiting for consumers to repay the loans, the auto lenders can get more money to make new loans sooner, by selling asset-backed securities. The trade-off for the auto lenders is that they earn less interest than they would, if they simply collected the payments from consumers themselves.

In turn, investors in asset-backed securities historically have accepted lower rates of return than they could make from other investments. The upside for investors was that compared to other forms of loans, auto loans are usually dependably paid. Even in today’s market, losses for prime-risk auto lenders like Ford Credit are in the low single digits.

In addition, the lenders that sell asset-backed securities back them up with additional guarantees that investors will get paid. Ultimately, the value of the loans is backed up by the value of the assets, that is, the value of the cars and trucks behind the loans — hence the name, “asset-backed” securities.

However, investors bailed out of the asset-backed securities market in late 2008. If auto lenders can’t borrow money themselves, they can’t lend money out to consumers.

Jackson of AutoNation said getting credit going again would go a long way toward getting the auto industry back on its feet. “Even with all the turmoil, with all the havoc, we have enough traffic in the showroom. Our business would go up 20 to 25 percent, just by getting some sort of normal credit,” he said.