Leasing’s Blessing in Disguise

By Marcie Belles

Every cloud has a silver lining, and for the auto finance sector, Chrysler Financial’s exit from the leasing space may very well be it.

In fact, I posit, Chrysler’s move might be the springboard to right the severely damaged marketplace.

As I see it, there are several major problems with the industry right now. For one thing, the economy is off-kilter, which is sending vehicle sales volume plummeting. Also, gas prices are at record highs, so consumer are scrambling to offload sport-utility vehicles and light-duty trucks in favor of compact cars. The glut of those vehicles is crimping resale values and pummeling lessors with high residual value losses.

To a certain degree, the market is trying to reach equilibrium with the continued decline in vehicle sales. The 17.5-million-vehicle sales-pace bubble has popped. In the past few weeks, industry pundits have revised downward their 2008 sales estimates to the low-14 million range — a more realistic level, and a good start.

So how will Chrysler’s lease exit help? Here’s the thinking: Chrysler leaves the space, and other financiers follow suit. General Motors Corp. has already announced that it will cease leasing in Canada. And Chase Auto Finance has said it would stop offering leases to Chrysler dealers. The leasing slowdown, combined with the lower sales volume, will help clear out auction inventory.

Needless to say, auction values are under intense pressure. A look at Ford Motor Credit Co.’s second-quarter earnings report puts things in perspective: Loss severity on remarketed vehicles last quarter hit $10,000. Considering that the average amount financed for new vehicles in May (the latest month for which data were available) was $24,911, according to the Federal Reserve, financiers face some serious losses.

But the auction bottleneck will further be eased by a decline in gas prices — or consumers’ resignation to the reality of the current high prices. In fact, I read a statistic the other day from the National Automobile Dealers Association that said for every $1 increase in the cost of a gallon of gas, large pickups decline in value by an average of $2,200, while resale prices of compact cars rise by about $980.

As wholesale prices begin to rebound, so will financiers’ bottom lines. And without the burden of lease residuals, the recovery should endure.