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U.S. Motor Lenders Fear Risk Turmoil

March 29, 2007

The U.S. motor industry is eyeing the subprime mortgage market for signs of the turbulence in real-estate finance spreading to high-risk automotive loans, The Financial Times reported.

Like the property sector, subprime loans for car and truck purchases have increased in recent years. According to Oregon-based CNW Research, the value of this high-risk business soared from $6bn in 1999 to $11.6bn (8.7bn), last year, bringing subprime loans outstanding to $34bn.

CNW estimates that subprime deals made up nearly 13 percent of automotive financing last year, up from 9.4 percent in 1999.

Tighter lending terms and higher repossessions could further dent vehicle sales when demand is already soft. The weakening property market has contributed to a fall in U.S. pick-up sales.

Recent patterns in the subprime automotive market are mixed. Paul Taylor, chief economist at the National Automotive Dealers Association (NADA), said, "Some subprime lenders may be looking at scaling down car loans, but others are looking for a way to replace the diminished loan volume in real-estate lending, both prime and nonprime."

Trish Myers, finance manager at a Chrysler dealership in Cairo, Georgia, said, "Subprime lenders are expanding, and are very liberal with rates and volumes."

However, Wells Fargo Financial reported a slowing in its motor financing business in the fourth quarter. It said loan losses were "at elevated levels" towards the end of 2006, and that it had "adjusted account acquisition strategies to reduce new loan volumes, particularly in higher-risk tiers".

GMAC, the financial services group 49 percent owned by General Motors, struck a more optimistic note. Bill Muir, chief operating officer, told investors on Wednesday, "There is a slight deterioration in delinquencies, but not something we're concerned about at this point."

GMAC motor credit losses edged up to 1.05 percent of average retail contracts in the fourth quarter from 0.96 percent a year earlier.

Taylor said that while homeowners could give up their properties and move into rented accommodation, losing a vehicle could cause considerable hardship.

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