U.S. auto sales were hobbled in the first half as gasoline prices jumped to record highs. Now, a financial crisis that pushed Lehman Brothers Holdings Inc. into bankruptcy has toughened new-vehicle loan terms and may further depress sales.“The panic over fuel prices this year brought the quickest shift from trucks and SUVs to cars I’ve ever seen,” said Dave Zuchowski, vice president of sales for Hyundai Motor Co.’s U.S. unit, in an interview yesterday. “The new story is access to credit. That will impact us more in the second half.”
U.S. auto sales dropped 11 percent through August from a year earlier, putting the industry on course for its lowest volume since the early 1990s. A Lehman report, issued last month before the company’s collapse, estimated that tighter auto- lending standards in the second half may cut sales by as much as an additional 10 percent.
“That’s going to keep a lid on things, keep things depressed for a good period of time,” said Erich Merkle, an analyst for Crowe Horwath LLP, an Oak Brook, Illinois-based financial consulting firm. “I don’t see things bottoming until mid-next year before we can start that long, slow road to recovery.”
General Motors Corp. Chief Executive Officer Rick Wagoner this week said consumer financing is now “much tighter” and urged the Federal Reserve to cut interest rates.
“Our problem isn’t gas prices,” Chrysler LLC President Jim Press told reporters on Sept. 2. “Our biggest problem is credit.”
This year through August, GM’s U.S. vehicle sales fell 18 percent, Ford Motor Co.’s dropped 15 percent and Chrysler’s plunged 24 percent.
The Federal Reserve Board’s July loan officer survey found that the willingness to make new consumer loans was 22.3 percent lower than the previous period. Banks are requiring bigger down payments for auto purchases and higher personal credit ratings. Together with lower residual values for used cars that are often used as a proxy for down payments, the combination means fewer qualified buyers.
Christopher Dodd, chairman of the U.S. Senate Banking Committee, told Bloomberg Television yesterday that turmoil in the financial industry means “credit does not exist” right now.
“I was told today you have to have a FICO score of 720 to qualify for a car loan,” Dodd said. “The effects of this could be huge.”
FICO scores are consumer-credit ratings by Minneapolis- based Fair Isaac Corp. The average score of new-vehicle buyers in August was 749, up from 734 a year earlier, according to CNW Marketing Research Inc. Scores range from 300 for very poor to 850 for perfect.
Banks already tightened credit for consumers and companies this year after $515 billion of asset writedowns and credit losses since the start of 2007 amid the worst housing slump since the Great Depression.
Mark Oline, a Chicago-based credit analyst at Fitch Inc., said last week he’s “very concerned” that automakers will be unable to raise cash for consumer financing because yields over benchmark rates on auto asset-backed securities are at record highs. That may force carmakers to further cut production because buyers for securities that help finance new-vehicle loans are drying up, according to Fitch.
Fed Is Watching
Fed Chairman Ben S. Bernanke and colleagues left the main rate unchanged at 2 percent Sept. 16 and signaled they will continue to monitor the market turmoil.
While Hyundai’s Zuchowski, Toyota Financial Services spokesman Justin Leach and Wilmington, Delaware-based auto dealer Frank Ursomarso disagreed that credit scores need to be as high as Dodd suggested, lending guidelines have tightened, they said.
“Money down is definitely a factor, credit score is a factor, past history with a lender is a factor,” said Ursomarso, whose Union Park Automotive dealership has stores selling models from Honda Motor Co., Bayerische Motoren Werke AG’s BMW, GM’s Pontiac and GMC, and Ford’s Volvo.
“If everyone had to have a score of 720, the whole industry would shut down,” Ursomarso said. “What’s dried up are loans to subprime and near-prime borrowers that were pretty risky.”
U.S.-based automakers are suffering more from tougher lending conditions than Honda, BMW and Toyota Motor Corp., which are in stronger financial shape and have better-funded lending units that remain eager to write loans, he said.
“Not 45 days ago I had someone from BMW Credit sitting in my office asking me if I would spread business around, sending them more used-car business and customers from our Pontiac store,” Ursomarso said.
Similarly, Toyota Financial Services, the largest Japanese automaker’s U.S. lending arm, expects credit conditions to help its business.
“We benefit from having a triple-A credit rating,” George Borst, chief executive officer of the Toyota unit, said in an e- mailed statement. “This positions us as one of the auto finance companies with ready access to financing.”
The Toyota unit was the largest auto lender in the U.S. by market share this year through June, topping for the first time GM’s former finance arm, GMAC LLC, trade publication Automotive News said last month, citing data from Experian Plc’s AutoCount research unit.
Toyota Financial Services arranged 6.4 percent of U.S. vehicle finance and lease contracts in the first half, compared with 6.2 percent for GMAC, the report said.