Tightening credit slams auto sales

The troubles on Wall Street are clobbering the car lot on Main Street, with automakers and dealers saying tougher credit requirements are knocking potential buyers out of the market at a time when the struggling industry can least afford it.

At AutoNation Inc., the country's largest dealership group, tougher credit requirements from banks and finance companies – and limits on money to fund leases – cost the 250-store chain 20 percent of its sales volume so far this year, CEO Mike Jackson said.

“It's a huge problem,” Jackson said. “The volume of the industry for both manufacturers and retailers is being dramatically restrained by credit. Sales are far below demand and far below trend.”

Customers are having trouble getting loans, and if they do qualify, they are paying higher interest rates. That's forcing the whole U.S. industry to lower prices through incentives to scrap for sales in a shrinking market, Chrysler CEO Bob Nardelli said.

“I think we really got ourselves in a really challenging situation,” Nardelli said last week. “We have all these negative things vectoring in.”

Automakers are scheduled to report September sales figures Wednesday, and the credit issues, combined with continued economic worries, don't bode well for them.

“September is another tough month,” said Chrysler Vice Chairman Jim Press, who predicted that total U.S. sales will be worse than they were a month earlier.

Through August, U.S. auto sales were down 11 percent compared with the first eight months of 2007. The seasonally adjusted annual sales rate for August was 13.7 million, up from 12.5 million in July, the worst month in 16 years.

While General Motors Corp.'s offer of employee pricing for everyone helped fuel the improvement, September sales are likely to drop due to shaky consumer confidence spurred by Wall Street's upheaval.

And although gas prices have receded from July highs of more than $4 a gallon, buyers are still seeking fuel-efficient cars instead of more-profitable trucks and SUVs, once again raising questions about whether Chrysler LLC, Ford Motor Co. and GM can bring more small cars to market before running out of cash.

The credit issue adds one more obstacle keeping many people from buying a new car.

“We've gotten to the point now where only those with unblemished, flawless credit are getting approved for auto loans,” said Joe Barker, senior manager of North American vehicle sales forecasting for CSM Worldwide in Northville, Mich.

Dealers say subprime borrowers, those with credit scores of around 600 and below, have been pushed from the market by banks and automakers' finance companies, which are fearful of lending to risky customers because of widespread mortgage defaults that have brought down three Wall Street icons and a major insurance company.

The automakers' finance arms often raise capital by bundling auto loans and selling them as securities, and more of those loans have defaulted as the economy has deteriorated. Now that any collateralized debts like mortgages have fallen out of favor, the securities are more difficult to sell, making it harder for the finance companies to raise more money to lend.