The Next Mortgage Casualty
GMAC Swings to a Huge Loss on Mortgage Industry Exposure
Many people might be surprised that General Motors was the next causality of the mortgage industry. Even after they sold a 51% stake in their GMAC Financial Services unit to a private equity firm, their 49% stake still provided significant exposure to the mortgage industry. Surprisingly, the Chief Financial Officer suggests that analysts are underestimating GM’s exposure to the “mortgage industry meltdown.”
The Far Reaching Effects of the Mortgage Industry
GMAC turned a $495 million gain a year ago into a $305 million loss this year. GMAC attributed its loss to its mortgage unit. Less than three years ago GMAC single-handedly kept GM out of bankruptcy. Now, GMAC seems to be heading the other way. Worse yet, it seems to be taking General Motors down with it.
Many people don’t know that lots of companies do mortgage lending. While there are certainly pure mortgage lenders out their, most mortgages originate from banks and companies with mortgage lending arms. The car companies are one example of this. Most of them already have some kind of auto loan group. Adding a mortgage lending unit was only a natural extension. The lending business tends to have a much higher margin and is typically less volatile than the car business.
How Does the Mortgage Industry Collapse Affect Consumers?
Consumers will run into problems because many companies used mortgage lending as a way to boost profit margin. So not only will the price of mortgages increase, but there may also be increases in related goods. Companies like General Motors will be in serious trouble because they can no longer rely on the mortgage industry to supplement their income. Their only other option will be to increase prices in other areas.
Unfortunately General Motors is in an industry that is very price sensitive right now. It will not be able to raise prices because companies like Toyota and Honda are already beating it in quality and pricing (minus tariffs and taxes).
Who Will Be the Next Casualty of the Mortgage Industry?
While consumers might feel this indirectly, the next casualty could be investment banks and others who participate in the Residential Mortgage Back Securities market. The banks that were more aggressive in securitizing higher risk mortgages will be experiencing higher defaults. Additionally, now that investors have been bitten by the subprime mortgage market, expect required rates of return on these instruments to be higher.
For consumers this will mean higher mortgage rates and harder to obtain mortgages. The subprime lending collapse will have a far reaching affect on consumers. Hopefully, banks and Congress can stem the tide of defaults before irreparable damage is done.
What do you think about this article?
Comments
More in Business & Finance
Latest Articles