Leasing retreat a boon for little guy?
The auto leasing business is crashing, with major carmakers and leading banks bailing out of what was once a lucrative line. But that could be a good thing for small leasing companies, experts say.
“It has been nuts this week,” said John Blair, chief executive of Santa Barbara-based Automotive Lease Guide, which establishes baseline lease values. “There have been nonstop moves and countermoves by everyone.”
On Thursday, General Motors Corp. became the latest automaker to retreat from leasing, announcing that GMAC, its 49%-owned financing arm, wrote down $716 million in leases in the second quarter and would reduce origination and increase pricing of leases in the U.S., effective today.
Earlier this week, Ford Motor Co. said that it would raise prices on some sport utility vehicle and truck leases so much that they would be “lease proof.” Last Friday, Chrysler said it would abandon leases altogether.
Speculation swirled Thursday that the largest independent lease financier, US Bank, would abandon its used-car lease program. Wells Fargo & Co. said it would halt financing of any kind today, and JPMorgan Chase & Co. will no longer finance leases on Chrysler vehicles, limiting its business almost entirely to Subaru. Both the car companies and the banks have suffered as trucks and SUVs coming off lease have not held their value as expected, thanks largely to soaring gasoline prices.
But the great lease debacle of 2008 could yield surprising fruit: opportunity for the little guy.
For the roughly three decades that vehicle leasing has been available, automakers and their finance arms have dominated the market, with only the largest banks getting any real piece of the action. They did that by artificially boosting the residual value on cars and trucks -- the estimated worth at the end of a two-to-four-year leasing term -- in an effort to lower the payments for customers.
Now, with the big boys burned by the rapid depreciation of their gas guzzlers, little players that didn’t offer subsidies, such as credit unions, regional banks and indirect leasing agencies, may be able to step in, said Tarry Shebesta, past president of the National Vehicle Leasing Assn.
“Our members are very optimistic,” said Shebesta, also president of lease shopping site LeaseCompare.com. The key, he said, is funding. Much like mortgage lenders, big banks and carmakers tend to securitize portfolios of leases to raise cash used to issue more leases. Smaller leasing companies tend to finance their own leases and hold them.
With consumers accustomed to shopping for cars based on low monthly payments, plus the opportunity to drive a new car every two or three years, there’s a real chance that they’ll look for alternative leasing options rather than going back to traditional purchase loans.
“People still want leases,” said Scott Anchin, owner of Platinum Mobility Leasing in New York, a year-old specialty lessor. “There are hundreds and thousands of little companies out there ready to step up and offer them.”
For instance, San Diego-based Credit Union Leasing of America, under Chief Executive Terry Bowdler, is a conduit between consumers and credit unions and manages leases in excess of $350 million.
Bowdler’s clients are largely self-funded, and they write leases only for cars and trucks priced under $50,000, which limits their risk should used-vehicle prices take a nose dive. The firm’s business has grown 30% in the last quarter, in great part because of the resale values of the vehicles it holds. According to the Automotive Lease Guide, residuals for Honda Fits coming off three-year leases have gone up by 10 percentage points in the last year, while those for 3-year-old Ford Expeditions have declined 12.2 percentage points.
Since the leasing agency has to eat the difference between a car’s predicted residual value and the actual resale price, it’s no wonder that SUV-heavy Ford wrote off $2.1 billion in leases in the second quarter.
“The industry’s mistake was going after high-priced cars,” said Bowdler, whose portfolio is dominated by Toyotas, Hondas and Nissans. “We just want to lease nice, conservative, middle-of-the-road cars.”
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