GMAC, once a profit-generating life raft for GM, has had its own
problems in the past year due to problems in financial and automotive
markets. It reported a $2.5 billion loss in the third quarter,
bringing its losses in the past five quarters to $7.9 billion.
In the past few years, GMAC moved away from a focus on auto finance.
By 2005, mortgage lending and insurance accounted for 57% of its
income. Before the housing bubble burst, GMAC made a big push into
subprime lending and so-called Alt-A loans, those made to borrowers
who did not provide full documentation of their income.
"Alt-A-Loan", or an alternative documentation loan, is a mortgage
given to a borrower based only on their credit score. There is no need
for income verification or a documentation of assets, thus allowing
anyone with good credit to secure a loan. The only drawbacks,
generally, are a higher interest rate than standard loan types and a
longer processing time.
An "Option ARM" is a bit more dangerous though. Standing for Option
Adjustable Rate Mortgage, "Option ARMs" entice buyers with extremely
low initial interest rates into buying homes that are well above their
budget. These initial rates, known as "teaser rates", can start as low
as 1% but after a couple years time they readjust, often leaving
borrowers with double their monthly mortgage expense.
Where the problem lies is, these "Alt-A" and "Option ARM" loans are
beginning to reset. Now, homeowners are caught with an expensive home
and no money to pay for it. Thus, they are beginning to default and
foreclose on their once affordable "dream homes". Our country is about
to see a bomb go off that we lit the fuse to only a few short years
ago when the housing bubble was peaking.
If you thought that GM was not in trouble before - think again.
These "Alt-A" and "Option ARM" are only starting to show and for GMAC
and from there GM it will be one of the final nails in the coffin.
The subprime issue was bad but "Alt-A" and "Option ARM" are worse -