For General Motors Corp., lending endures as a counterweight to automaking, where profit margins have been shrinking for years. But profits from automotive lending, meanwhile, are under pressure because of falling car prices, according to a Bloomberg News story by Doron Levin.

Partly because of the erosion of prices for repossessed vehicles, GM on March 14 disclosed in a regulatory filing that it had raised its provision for loan losses at the end of 2002 by 40 percent to $3.06 billion.

According to Levin, investors understand that automotive lending can stay viable only if designing, building and marketing vehicles generate strong sales without giving away too much in rebates or subsidized loans.

"In 2002, GM's $1.7 billion of net income would have been impossible without the $1.8 billion earned by its GMAC financing arm, which more than compensated for weak automotive earnings worldwide, write-offs and losses from non-automotive businesses," Levin said.

Levin said the weak automotive performance was caused by falling prices, rather than poor sales. "Declining new-vehicle prices in the United States increasingly are deflating used-car prices, and drops in both pose a threat to GMAC's earnings," he explained, adding that Ford Motor Co.'s lending subsidiary is similarly affected.

"Our delinquency trends are favorable, and our customers are quite creditworthy," Eric Feldstein, GMAC chairman and president, said last week. "But when we repossess a car and have a loss from it, we're getting smashed."

Levin pointed out that back in 1997, the average loss on a vehicle repossessed by GM was $4,670; today it's $6,433. Since early 2001, used-vehicle prices have been driven down as automakers piled bigger and bigger discounts onto new models to stimulate sales, he said.

"The causality between used vehicles and new-car incentives flows both ways," said Tom Webb, chief economist for Manheim Auctions, the biggest auctioneer of used vehicles. In other words: incentives impair used-car prices, and lower used-car prices create the need for steeper incentives to sell new vehicles.

Levin said the glut of used cars has been a particular headache for auto finance companies, which must find buyers for vehicles that return to dealerships when leases expire. Leasing, which reached a peak of 34 percent of all sales in 1998, dropped to 22.4 percent of transactions in February, according to Art Spinella, analyst with CNW Marketing/Research Inc. in Bandon, Ore.

Installment loans, which financed 55 percent of new vehicle transactions in 1998, now represent close to 70 percent -- thanks in part to GM's widely imitated initiative offering of no-interest financing starting in the weeks after the Sept. 11 terrorist attacks in 2001, Levin pointed out.

"How or when the industry -- especially GM and Ford -- can escape from the price whirlpool isn't clear," Levin said. "A big surge in economic growth could stimulate demand, allowing carmakers to shrink rebates. Another possibility is that one or more automakers are forced to shut down capacity, trimming supply."

Ford Motor Credit Co., Ford's captive financing arm, in January said it increased its reserve for loan losses to $3.2 billion in the fourth quarter from $2.8 billion a year earlier.

"With automotive earnings under pressure at the parent companies, GMAC and Ford Credit are working to maintain their strong balance sheets," Levin said. "Profitability from lending, after all, relies on the ability to raise enough money -- and at favorable enough rates -- to finance wholesale and retail purchases of their vehicles."

Until the second quarter of 2002, GMAC and Ford Credit were able to sell unsecured bonds at 200 to 250 basis points above the yield on 10-year U.S. Treasury Bonds, according to Bloomberg News. By the third quarter of last year, nervous investors and lower credit ratings had driven yields 400 to 500 basis points above the yield on 10-year Treasuries. (One basis point is 0.01 percentage point.)

"We've swung much more heavily to asset-backed securities," Feldstein said. "Our mix of borrowing has changed dramatically."

At the end of 2002, unsecured debt had dropped to 28 percent of GMAC's $192 billion debt portfolio, from 66 percent a year earlier, according to Levin. Meanwhile, secured debt rose to 47 percent of the total. The asset-backed securities let carmakers raise cash by selling debt backed by loans on cars and trucks, with loan payments used to cover interest and principal, according to Bloomberg News.

"I think we'll be more innovative going forward," Feldstein said. "There are all kinds of ways we can raise money at the retail level, maybe from wealthy investors directly, instead of channeling our securities through the usual big investment funds."

Feldstein said he's confident that GMAC earnings in 2003 will be in the range of $1.7 billion to $1.9 billion -- possibly making it the ninth straight record year for the unit. "If GM's automotive operations ever achieve a similar streak, the automaker's common stock, which trades near an eight-year low, will be much more popular than it is today," Levin commented.