Since July, the Detroit 3's captive finance companies and several national banks have placed strict new limits on leasing or exited the business. Industry experts predict the cutbacks will have these effects:
-- New-vehicle purchases financed by loans of six years or longer, once rare, will become more prevalent. Loan maturities of 72 months or more now make up 43.6 percent of loans arranged by dealerships, according to J.D. Power and Associates.
-- Some independent lenders will seek to increase their leasing business, but their programs are likely to be less competitive and more restrictive than the factory-subsidized leases offered by captives.
-- Customers who still want to lease vehicles will shift from Detroit 3 to import brands.
"There is a big portfolio of customers who have leased vehicles for a long time," says Carlos Hoz de Vila, a suburban Philadelphia dealer who operates domestic and import franchises. "There's going to be a defection to other brands because now Chrysler, General Motors and maybe Ford don't offer competitive programs."
Dealers and bankers predict that huge losses on sharply depreciated big trucks coming off lease will chase more lease providers from the market or cause them to stiffen their standards.
"There are ample lenders in the marketplace, but they have all tightened credit," says Mike Baker, CEO of Bob Baker Enterprises, a San Diego dealership group that sells import and domestic brands.
|Cutbacks by Detroit 3 captives likely will reduce their share of the U.S. vehicle leasing market. In the first half of 2008, these were the 12 biggest lessors, based on volume of new- and used-vehicle leases.|
|COMPANY||% MARKET SHARE|
|1. GMAC Financial Services||13|
|2. American Honda Finance Corp.||12.6|
|3. Ford Motor Credit Co.||12.2|
|4. Toyota Financial Services||10.7|
|5. Chrysler Financial||9|
|6. Nissan Motor Acceptance Corp.||7.8|
|7. BMW Financial Services||6.2|
|8. VW Credit Inc.||5.7|
|9. Mercedes-Benz Financial||3.6|
|10. U.S. Bank||1.9|
|11. Chase Auto Finance||1.8|
|12. World Omni Financial Corp.||1.4|
|Source: AutoCount, Experian Automotive|
New lendersFor now, dealers say, some lenders are offering to pick up the slack created by leasing cutbacks.
"U.S. Bank is signing up dealers," said Stewart Garfinkel, business manager of Security Dodge-Chrysler in Amityville, N.Y. "We didn't need to do business with them in the past.
"When your captive finance company is giving you all kinds of incentives and telling you how much they want your business, you tend not to use other people," Garfinkel told Automotive News. "Then they pull the rug out from under you."
Tom Wirth, senior vice president of U.S. Bank, says the company remains committed to vehicle leasing but declined further comment.
Garfinkel said he also wants to lease vehicles through Hann Financial Service Corp., a regional finance company in Jamesburg, N.J. Hann President Charlie Dovico says his company has been flooded with calls from Chrysler LLC dealers since Chrysler Financial stopped offering leases to U.S. consumers this month.
But Dovico warns that Hann's credit standards are tougher than those of the typical captive, whose main mission is to help the parent automaker sell cars and trucks. "We don't offer tiered pricing" for customers based on credit history, Dovico says. "We either approve them or reject them."
In the first half of 2008, leases accounted for less than 1 percent of auto contracts backed by credit unions. Tony Boutelle, CEO of Credit Union Direct Lending, says members of his organization are more likely to emphasize loan options.
"With the lease market drying up, credit unions have 72- to 84-month loan programs," says Boutelle, whose group is a network of credit unions that offer vehicle financing through dealerships. "We are doing well in this tough economy."
Weakened assetsOther banks also express caution about leasing. In July, Huntington National Bank, of Columbus, Ohio, stopped writing leases on trucks and SUVs. "We will be very selective as to what we put in the portfolio," says Nick Stanutz, senior executive vice president of Huntington.
Detroit 3 captives, banks and other leasing companies often raise money by bundling auto loans and leases and selling securities backed by those assets. But investors who worry about plummeting truck values and rising auto loan delinquencies are demanding a greater return in exchange for the risk those securities represent, says Hann Financial's Dovico.
Although his company's securities are top-rated, Dovico says, the high costs of selling asset-backed securities "make no sense."
Like their Detroit 3 competitors, Toyota Motor Sales U.S.A. Inc. and American Honda Motor Co. Inc. must cover losses on off-lease trucks and SUVs. Those companies' captives say they aren't pulling back from leasing — but aren't greatly expanding that business, either.
"We are not planning any major changes in our approach to leasing," says Toyota Financial Services CEO George Borst. "We feel it is important to provide our dealers in the lease market with a variety of affordable options for their customers."
Residual values for small and mid-sized cars have held steady or increased, while residuals on big SUVs and pickups have fallen across the board. So carmakers with strong lineups of cars, such as Toyota or Honda, can offer competitive leases.
"The residuals on those vehicles are going up, which brings the lease price down," says Allen Levenson, sales and marketing vice president of Asbury Automotive Group, a public dealership group in New York.
As companies bail out of leasing, Levenson says, "Honda and Toyota could actually be beneficiaries."