The Federal Government In the Car Loan Business

The federal government is highly active in getting banks to reset loans for people who want to stay in their homes by improving the terms of their monthly payments. The Homeowner Affordability and Stability Plan has had mixed success, but it has helped keep tens of thousands of people in their homes. It might be said that keeping even one person from being thrown out into the cold is worthwhile, although the Administration’s entire home foreclosure program is a $75 billion multi-purpose plan designed to help as many as nine million borrowers suffering from falling home prices and unaffordable monthly payments. That is an expensive program to help what may be a modest number of people with their mortgages

The government tried to make a related effort to help the auto industry. “Cash for clunkers” did not change people’s car payments. It did give them financial incentives to buy more fuel-efficient cars and those incentives were large enough to bring down the total cost of owning a new vehicle considerably.

AutoNation (NYSE:AN) CEO Mike Jackson, the man who runs the largest publicly traded car dealer chain in the country, said he does not expect to see an improvement of any magnitude in US vehicles sales until 2011. This year, the American market will only support the sales of about 10 million cars and light trucks. That level is so low that it nearly put GM and Chrysler out of business. Jackson believes the industry faces at least one more hard year because of unemployment and the lack of credit.

“They simply don’t have the money to lend. So, of course, they make the standards unreasonably tough and unreasonably difficult, because they just want to say no. They don’t want to say yes,” Jackson said in an address quoted by the AP. And, it is really that simple. Many people who could normally afford a car and still have a job cannot get a car because they cannot get a loan.

The federal government has the opportunity to help the car industry and the hundreds of businesses that supply it and the tens of thousands of people that they employ by doing just one simple thing. That is to guarantee the car payments of people who are credit worthy by most reasonable standards. The guarantees can be made through the normal banking system or the lending arms of the car companies. The government would probably be taking a very modest risk if the car buyers are screened through the typical lending process.

A South Korean car company, Hyundai, will allow people who lose their jobs or become disabled to turn their cars back to the dealer within a year of purchase.

The American government is not making an offer like Hyundai’s but if it wants to get the car business back in gear it is going to have to come up with some reasonable plan to help creditworthy buyers buy cars.

Douglas A. McIntyre