Back to the Future: The Leasing Mess
Posted by: David Welch on July 30, 2008
General Motors and Ford are pulling back on leasing. Chrysler and Wells Fargo Bank will stop writing new car leases altogether. Ford and BMW have already taken charges because of losses in their lease portfolio. Should the carmakers have seen this coming? Yes, but not for the reasons you might think.
Granted, none of the carmakers saw the recent spike in fuel prices that precipitated the opposite reaction in suv sales and resale values. That freefall in sales of gas guzzlers means that when carmakers get these three-year-old suvs back after a lease, they’re worth far less than they thought they would be. That explains why BMW took a nearly $400 million charge in the first quarter for lease problems and Ford said bad lease deals will cost it $2.1 billion.
That auto makers missed a wicked shift in the market isn’t surprising. What’s far more unnerving is the fact that they took huge losses from leasing just a few years ago and didn’t learn. In the late ‘90s, carmakers went wild with leasing to offer consumers low monthly payments and goose car sales. Leasing accounted for as much as 30% of all vehicle sales back then, says Jesse Toprak, executive director of industry analysis at Edmunds.com. Now, it’s about 25%. But when all those used cars came back and flooded the market, resale pries dropped and many lenders lost money. By 2003, leasing became just 11% of U.S. car sales and carmakers collectively lost billions on the value of their leased vehicles.
So here we are in 2008. Sales and prices of suvs have been on the wane for at least three years and the auto makers are just now pulling back on leasing. They should have seen this coming and pulled back earlier. Auto executives have bemoaned falling vehicle prices in the U.S. since 2000. That means someone knew they had pricing problems. But like mortgage lenders who sold Americans bigger homes than they needed, leasing was a way to get the middle class into larger, more luxurious suvs than they needed. And now the bill is due for everyone.
