AUSTIN, TX – Overextended credit in an overheated housing market could hurt auto sales this year.

That’s because many consumers in the past bought vehicles with money from refinancing their homes. A lot of those homeowners went to the well too often, scooping out virtually all of their home equity, which precludes further refinancing.

Moreover, housing equity is taking a hit in many cases as real-estate values have dropped nationwide.

It means less loan money available for the purchase of big-ticket items such as new cars, although GMAC’s Ditech.com division’s advertising continues to urge consumers to refinance their mortgages in order to get extra cash.

Many borrowers rode a strong economy and vibrant housing market, “but the shock absorbers are gone,” says Mark M. Pregmon, executive vice president-consumer lending for Sun Trust Banks Inc. “They no longer have the ability to refinance.”

That is one reason 2007 U.S. auto sales got off to a slow start, say finance executives attending the Consumer Bankers Assn.’s 27th annual automobile finance conference here.

“The days are gone from three years ago when people took equity from their homes and bought new cars,” says Jeffrey S. Turnley, president of the PNC Dealer Finance Corp.

Home equity loans added about $1 trillion to the economy, says Gene Stanaland, president of GSE Inc. and former chairman of the economics department at Auburn University in Alabama.

Another ripple effect of the softening of the housing market cited at the conference is that fewer housing starts means fewer jobs. That, in turn, means less income and need for construction workers to buy their typical vehicle of choice: pickup trucks.

“That could hurt domestic auto makers because they make a lot of money on trucks,” says Robert Barry, vice president-global investment research for Goldman Sachs.

There’s a new downward trend to the softening of the housing market hurting truck sales, says Walter Cunningham, president of Benchmark Consulting.

“In the past, truck (segment) sales have remained fairly constant during soft vehicle periods,” he says. “But we’re seeing a decline in truck sales and an increase in delinquencies because of the housing market situation.”

A good-news indicator is that housing starts seem to be rebounding from a 9-year low, with builders starting construction of new homes at an annual rate of 1.524 million in February, more than economists had predicted.

CBA members worry how auto sales and lending will be affected by the crisis in the subprime mortgage market, a sector that has seen uncomfortably high default rates.

“Subprime pressures in the housing market could bleed over to the rest of the economy,” Barry says.

Pregmon says: “I worry about the average consumer out there.”

He points to a reverse trend in which people are defaulting on their mortgage payments, yet still making their car-loan payments. “Usually it’s the other way around,” he says. “They still need that car to get back and forth, especially if it’s to and from work.”

More than 2.1 million Americans were behind on their home-loan payments last year, and new foreclosures broke a record, according to the Mortgage Banks Assn.

And although it is not rare for car owners to be “upside down” – owing more on the car than it is worth – overly active home refinancing has caused many mortgage holders to be upside down on their homes.

Still, the nation’s overall economy seems in relatively good shape, with consumers spending far from paralytic.

“It is hard to bet against the American consumer,” says Paul Wible, senior executive vice president for Bank of the West. “Unless there is a spike in unemployment or a crisis hits, we’re in pretty good shape. The subprime mortgage issue and home equity issue are expected. We need to worry about the unexpected.”

But Pregmon fears the subprime mortgage crisis might have “a halo effect” that looms over the general economy.

Stanaland adds: “As far as the housing debacle is concerned, falling prices of homes make people feel less wealthy, and that affects their spending decisions.”

He says the economy will slow this year, but not enough to throw the country into a recession.

Although subprime lending has hit a wall in the mortgage sector, its automotive counterpart is coming off a good year.

“It is hard to over-emphasize the importance” of subprime auto lending, says Tom Webb, chief economist for Manheim Consulting.

He points to $100 billion in annual loan originations and to the fact that more than 40% of all used-vehicle financing is subprime.

Subprime auto financing currently is hitting “in the sweet spot,” Webb says, referring to originations growing, defaults declining and recovery rates rising.

He offers these subprime warnings:

  • Borrowers are highly leveraged and sensitive to fuel prices.
  • The subprime mortgage situation “adds a new wrinkle.”
  • The industry is “prone to cycles.”

Turnley concurs with that, saying: “This business has cycles, and you can’t jump every time the delinquency rate goes up.”

Pregmon, whose bank is a prime lender, says dealership finance and insurance managers have been telling him lately: “You guys need to buy deeper.”

His response: “We have an obligation to customers not to put them in something they can’t get out of.”

From their perspective, some automotive lenders see a possible silver lining in the home-financing woes.

“With fewer home-equity loans available, people will be more likely to take out auto loans,” says one CBA conference attendee. “On the other hand, they may be less likely to buy a new car.”

sfinlay@wardsauto.com