Did Negative Equity Contribute to GM's Downfall

The current industry practice of rolling negative equity in new car loans could be a factor in GM's downward spiral. Negative equity occurs when a car buyer owes more on their vehicle than the vehicle is worth or than the dealer is willing to give on trade-in. In the past, dealerships have traditionally added in the negative equity into the total price of the vehicle which the car buyer finances. Of course, this means that not only does the brand new vehicle lose thousands in value when you drive it off the lot, but now the buyer has to pay thousands more for the vehicle because of the negative equity. (Fortunately, Chapter 13 allows the consumer to strip off the negative equity from the contract if the vehicle was purchased in the last 910 days before filing.) However, if the buyer defaults on the loan, the lender is stuck with the negative equity burden. Despite the potential losses, lenders, including GM who is one step away from bankruptcy, continue to pad loans with this non-existent collateral causing analysts to scratch their head.

clipped from market-ticker.denninger.net We have SIVs, "Covenant Light" (the businessman's version of "no ratio" mortgages), fog-a-mirror mortgages, toggle bonds, securitization with cooked ratings and "errors" in computer programs, negative amortization, rolling balances forward in auto lending and more. We have consumers who have been rolling credit card debt from one zero-interest balance transfer card to another in a desperate attempt to avoid having to make payments they don't have. We have commercial real estate construction loans going out with cap rates that are insanely light - all "on the come" of appreciation in "values", and our Boomers have spent the false appreciation that they never had, destroying the largest store of wealth they owned - their homes. (BTW, GM is still writing negative rollover auto loans! If you're wondering whether GM can or might actually go under, the answer is "yes", and that's why.)