The Subprime Nation

The Trumpet (Link) - Robert Morley (June 8, 2010)

General Motors can�t keep up with demand. Vehicles are speeding off dealer lots. Does this surge in sales indicate that the economy is recovering? Or does it just mean that America hasn�t learned anything from its mess?

As GM goes, so goes the nation.

On June 2, GM announced a huge improvement in vehicle sales, up 17 percent over May of last year. The company also posted its first quarterly profit in almost three years. Showing strong demand for new models and higher fleet sales, GM appears to be benefiting from an improving economy.

Appearances can be deceiving. You might think the American economic recovery is for real, but don�t go out and mortgage the farm just yet.

Double-digit jumps in sales volume are certainly good signs, but beating last year�s figures isn�t much to brag about, if you recall. One year ago, GM (and Chrysler) were headed into bankruptcy protection, factories and dealerships were being shuttered, fears abounded about purchasing a vehicle from a company that would be run by government bureaucrats, and the whole economy was in free fall.

The real shock would have been if GM didn�t beat last May�s numbers.

Additionally, there is another reason taxpayer-owned GM appears to be firing on all cylinders. In May, while many other manufacturers cut back on incentives, Government Motors actually increased them by 13 percent.

One wonders if GM has become a more integral part of the government�s economic stimulus plan than advertised.

Overall, U.S. vehicle sales are estimated to hit between 11 and 12 million units this year�up from 10.4 million last year, but far below the 17 million that Americans purchased before the recession. In that context, the GM recovery isn�t so amazing at all.

According to GM�s top North American executive, Mark Reuss, the biggest thing holding back the company is its inability to sell cars to subprime borrowers. Since GM sold its lending unit, GMAC (which then had to be bailed out and taken over by the government), it has not been able to sell vehicles to people who cannot afford traditional loans. This has put the company at a disadvantage to Toyota and Ford, which still sell cars to risky subprime borrowers.

According to the Associated Press, officials from government-owned GMAC, which has changed its name to Ally Financial Inc., are open to the idea of issuing more subprime loans to boost auto sales. If Ally does decide to loan money to subprime borrowers, government-owned Chrysler will also want in on the action.

It is a telling economic indicator when America�s largest automobile manufacturer sees its biggest growth opportunity in pushing vehicle sales to those with poor credit.

Has the government and Government Motors learned nothing from the subprime mortgage debacle that almost bankrupted America�s biggest banks and led to the federal government virtually nationalizing the country�s whole mortgage market?

Two years after the massive subprime mortgage meltdown that wrecked the economy, the government is still backing risky subprime-like loans to people who only have to put up a 3 percent down payment. In fact, these risky loans, backed by the Federal Housing Authority, are the most popular loan in America. Is it any wonder that Americans in aggregate now have more mortgage debt than home equity?

And now the National Association of Home Builders is lobbying to have the federal government (aka taxpayers) provide backing for its loans because private lenders consider it too much of a credit risk. Legislation introduced on May 26 by Brad Miller (D-N.C.), Carolyn Maloney (D-N.Y.), and Joe Baca (D-Calif.) would create another new taxpayer-funded subprime-like lending program within the Department of Treasury.

Subprime car loans, subprime mortgages, subprime builders� loans�America has become a subprime nation.

Even America�s students and universities are addicted to subprime lending. The Washington Independent warns that a �severe hangover left by the cocktail of cheap credit and spiraling college tuitions� is about to hit �tens of thousands of young people saddled with � what is, effectively, subprime student loan debt. In some cases, that student debt is more onerous than mortgage or credit-card debt, since it is difficult to get rid of via bankruptcy.�

With university grads leaving campus, hundreds of thousands of students are about to hit the streets looking for work. What will they find? The highest unemployment rate in decades. Meanwhile, their loans now have to be repaid. Tens of thousands of dollars of debt�and no jobs.

The class of 2010 is in a fine mess. But they are far from alone.

The state of New York is on the verge of bankruptcy again. For the third time since December, the state has stopped paying its bills. This time it has held back $2.5 billion in payments from its vendors.

Arbitrarily withholding payment is a precedent that many Americans are taking full advantage of. Over 650,000 households have not made a single mortgage payment in 18 months, reports the New York Times. And with almost one in five of these loans, the lender is so swamped that it has not even begun to take action to repossess the property. There are an astounding 1.7 million households currently in some stage of foreclosure.

Hundreds of thousands of Americans have lived in their subprime-enabled McMansions for over a year without paying a cent.

Ironically, the foreclosure backlog has given a short-term economic boost to the economy. All those people not paying their mortgages have a whole lot more money to spend on other things. But the boost to the economy will be only temporary.

Soon the world will wake up and realize that America is just one great big subprime bubble inflated with money the nation does not have and never hopes to repay.

It is time to face the facts: America is a subprime nation, and the bubble is ready to pop.