GMAC to Ally: What, When and Why?
The company previously known as GMAC has gone through many permutations through the years. GMAC (General Motors Acceptance Corporation) was founded in 1919 by the General Motors automobile company, as an alternative to banks for financing their automobile buyers’ loans. The company became a financial powerhouse in the financial world, taking on home mortgage financing, venture capital and corporate financing, insurance, and private banking. By 2005, GMAC Mortgage had a more than $225 billion stake in the U.S. mortgage portfolio market.
In 2009, GMAC was purchased by its own banking subsidiary, Ally Bank. The reason for this buyout is complicated, and rooted in the economic downturn that is still being felt today. In 2006, property values peaked, and the number of adjustable-rate mortgages (ARMs) being issued to normally unqualified homebuyers was very high. Banks were free with credit even to those with bad credit history, in an eagerness to accumulate larger property portfolios, which is one of the main kinds of the currency with which large international capital firms use in their financing. These buyers were assigned home loans with an interest rate which would reset based upon market and prime rate fluctuations, and the problem with this is that the interest increase would cause a substantial increase in the monthly payment. However, in late 2006, property prices began a steep decline, and the economy was thrown into a panic. ARMs reset to high rates, and since many homeowners had suffered layoffs or decreases in income due to the recession, they were unable to make their payments. The massive numbers of defaults (the number of mortgage foreclosures jumped from 100,000 nationwide in 2005 to 1 million in 2009) sent major banks scrambling to cover their losses. The major lenders, GMAC included, have been investigated for inconsistencies in practices and in some cases outright fraud in their foreclosure procedures, which culminated in GMAC foreclosures being suspended in September of 2009 until federal regulators and state investigators had a better opportunity to examine the banks’ files.
Due to the bad press caused by these events, it was felt that it was best to have Ally, which was in good standing, purchase GMAC and rebrand the company, in the hopes that a new name would engender better feelings. So far, Ally has publicly proclaimed its eagerness to comply with the regulators, but only time and concrete proof will tell whether or not this will turn out to be true.
