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 - much worse.