
GM, Ford Credit Arms May Lose Billions on Car-Price Plunge - JumpCrisscross
https://www.bloomberg.com/news/articles/2020-04-20/gm-and-ford-face-billions-in-losses-from-historic-car-price-drop
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jedberg
> Physical auctions have been halted for weeks along with much of the rest of
> the economy.

Ah! That explains why I can't find a used car right now. We were actually
searching for a used car before the pandemic, and I've been checking
constantly assuming the market would be flooded with them.

Now I understand why the inventory stoped changing as did the prices.

~~~
japhyr
It's hard to imagine anything other than a flood of used cars at some point in
the near future. It sure feels like a lot of people are going to be cash-poor,
and need to sell whatever they can. I have no idea how lenders approach
repossessions when they might be stuck with a vehicle they can't sell because
of a glut on the market.

We were going to replace our 15 and 20 year old vehicles this year, but we're
holding off for now. We're hardly driving anywhere now, and who knows what the
auto marketplace will look like over the next 6-18 months.

~~~
rootusrootus
We won't really know until it happens, of course, but perhaps the glut will be
new cars, not used -- if a lot of people change their purchase decision from a
new car to a used one to save a few bucks.

~~~
jedberg
That's fine though. The main reason to buy used is to save money, but if the
new cars drop to used prices, then you get a new car and save money!

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r00fus
There was talk of a vehicle loan bubble in months previous. I wonder how that
impacts the feasibility of these financial arms of car companies's bottom
line?

Is this another bailout target?

~~~
mywittyname
The sub-prime loans were likely priced correctly and with the expectation of a
recession during the 84-month loan term.

The problem is leases. They are really attractive products for institutions
because they get prime-rate buyers to pay sub-prime interest rates on an
expensive vehicle. Dealers love them because it's easy to hide BS fees and
overcharge people who are shopping on monthly payments.

However, it's so easy for a lender to lose their ass on leases. The lenders
promise to buy back the car at some fixed price in the future. And finding the
right price for a residual is a delicate balancing act, if it's too low then
the monthly payments are high and there's likely some missed sales, and if
it's too high then the lender has to pay above market value for the car.

Last year, the F Series truck sold nearly 900,000 units. Ford doesn't report
their lease/purchase breakdown, but I expect it to be at least 50% of sales.
Meaning, for every $1,000 their lease residuals fall, they are losing at least
$450,000,000 per model year. And that's just looking at their trucks.

Not only that, Ford earned that sales money when times were good, then used
the profits to pay out dividends and buy back stock. But now, their lending
arm has to pay for this mistake when times are bad.

Granted, the F Series and other trucks are an outlier. A good selling _car_
(or crossover) moves like 300k a year. But still, I have to imagine that even
Rav4s and the like have a lease %.

This will be a bloodbath.

Edit: for reference, Ford's EBITDA were hovering in the low $10 billion range
for the past five years.

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tyingq
Not surprised really...the car market, both new and used, must be taking a
huge beating. Job security and loans plus _" oh gee, do I want to be in a
random person's car"_

Home sales is probably worse though. No live-in sellers want buyers wandering
around, and both sellers/buyers are almost 100% _" wait it out"_.

Curious if there's a loophole here for the greedy.

~~~
vidanay
That would be a really ambitious greedy loophole taker.

We were planning to put our house on the market May 1 with plans to move by
July. We are actually a year later than we wanted to be "because life" and now
we likely could be another year before we can implement our move.

I guess in a way we are lucky. If we had moved last summer, we would probably
have an 80% finished custom home build in limbo right now.

~~~
tyingq
Sure...you wouldn't be the target for the greedy. There must be, though, a
pretty good market of people that HAVE TO sell or buy for job relocation,
"need the equity", etc. And nobody really serving that in this environment.

And I say greedy, but there's a lot of room between the "we will give you half
market value" and regular realtors right now.

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csense
So how exactly will they lose money?

Do they think people will default on their car loans due to unemployment, then
the lender won't be able to repo and sell the car for enough to recover their
losses due to low demand for used cars?

Or do they still think they'll make money on their existing loan portfolio,
but be unable to roll maturing loans into new loans, because people will put
off buying cars?

~~~
integrii
Because they will sell less cars. That means they hold more cars. More cars
that are depreciating. They will drop prices to move cars. That means less
profits.

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dzonga
cars were now too expensive for common people to begin with. now they're
offering 84 month payment terms. when I arrived in america in 2012 car terms
were 36-48 months. & when you look historically at car prices compared to
wages, the situation is even dire

~~~
xnyan
We are living in strange times. If your credit is good, most automakers are
offering no interest loans and also not doing the normal trick of making the
no interest loan price higher to cover the spread. Very desperate to sell
cars.

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Waterluvian
I have a lease ending in June and really trying to figure out if there's any
waiting I should be doing or just get another one in June. I feel like I'm a
few months too early.

Maybe I'll have to wade back into actually owning a vehicle if the prices
absolutely tank.

~~~
aguyfromnb
> _Maybe I 'll have to wade back into actually owning a vehicle if the prices
> absolutely tank._

I would assume that if used car prices plummet, residual values on leases will
fall, making the leases more expensive.

Lightly used vehicles will be where it's at.

~~~
PaulWaldman
Not necessarily, leases are determined by the difference between the residual
value and selling price, not MSRP. Automakers will likely pile on incentives
to reduce the selling price.

Since car makers have their own finance arms, the residual prices will likely
be kept artificially high. This allows them to kick the problem down the road
until lease expiration.

~~~
Waterluvian
If I'm following your Hypothesis right, you're suggesting that maybe they will
artificially deflate the cost of a lease to move them, and then pay the price
when they get them back because they're worth less than estimated at start of
lease?

~~~
URSpider94
... or just give incentives up front on the MSRP. Manufacturers do both, it
depends on how the details of the accounting play out.

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dnprock
I think the world is heading into a deflationary crisis. We're just starting.
Corporations seem to think they are immune. Governments cannot do much to stem
this crisis. People should be ready to brace for more shocks. When we reopen,
we'd still be in recovery mode for at least a few years.

~~~
woofie11
Unless we print money. Lots and lots of money. I am counting on that
happening, or else on total collapse of everything.

~~~
integrii
Printing money defaces the dollar to the world. You can never create value,
even by printing money. The system will rebalance because nobody works for
free and everything is sold to the top bidder.

~~~
woofie11
Printing money does deface the dollar.

However, it can destroy or create value, depending on how its done and why.
Words like 'never' and 'always' are rarely true in economics. Value is being
destroyed through debt defaults, layoffs, and bankruptcies on a massive scale
right now. Inflation would almost certainly destroy less value.

My expectation is we won't get out of this without either:

(1) An economic collapse

(2) Cleverness

(3) Inflation, to where post-pandemic prices are a small multiple of where
they are today (e.g. 2-10x).

(4) Mass death and disability (people underestimate the economic impact of
having a big portion of the population disabled by COVID19 for the rest of
their lives)

Inflation seems like among the lesser of the possible evils right now.

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jaytaylor
Paywall-free link: [http://archive.is/A9DZT](http://archive.is/A9DZT)

(Because why should I have to reset my cookies to read the news?)

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jaytaylor
Last paragraph of the article:

    
    
        GM and Ford’s captive-finance
        companies and Ally are doing
        what they can to limit their
        contribution to the glut of
        used vehicles hitting
        auctions by offering
        extensions to lease
        customers. “That helps to
        manage the supply dynamics
        relative to demand and we
        think that overall positions
        the market to be stronger,”
        Laclair said.
    

I suspect this is likely legal, but when I read it, I got this feeling like
"that doesn't seem right". How can it be acceptable for a single private
entity to control that much of the market?

It's certainly manipulative. The reality is that cars should be less valuable
right now and for some period of time after an event like Covid19.

~~~
PaulWaldman
I have a lease that's up in May and have been offered an extension a few
times. They are even incentivizing it by keeping the price the same which is
interesting when you factor in lessee contributed cap cost reductions.

~~~
URSpider94
It’s cheap money on their part - keep the car in your hands and on your
insurance for 3-6 months until the market settles.

