Three out of four vehicles returned to leasing companies in 1997 generated a loss on the residual value, according to the annual auto finance survey by the Consumer Bankers Association.
The survey and separate estimates from CNW Marketing Research Inc. in Bandon, Ore., indicate that industry losses on residuals last year were about $670 million to $782 million.
The average loss per vehicle was $1,756, the bankers' group said. The survey implies that 12 percent of all leases that terminated last year resulted in a loss, said Rodney Bahr, the KMPG Financial Services consultant who analyzed the survey for the association.
Partly as a result of such losses, 'it will be interesting to see if in fact, leasing levels off in 1988,' Bahr said. Respondents to the bankers' survey said their lease originations grew only about 4 percent in 1997, compared to about 32 percent in 1996. The growth in leasing also slowed in 1995 after two years of 30 percent-plus growth.
About 70 percent of the survey respondents were banks. Most banks have been less gung-ho on leasing than to captive finance companies, but several captives, including leasing leader Ford Motor Credit Co., are included in the survey.
Residual losses are usually tied to lease incentives. The most common form of lease incentive is to reduce the monthly payment by inflating the residual value. The customer has to finance only the difference between the up-front cost and the residual.
At the end of the lease, customers and dealers are not likely to buy the vehicle if the residual is way out of line with what the vehicle is actually worth. That means the leasing company may have to take a loss when the vehicle is sold at a wholesale auction.
'If you look at many of the residuals that were set and do your economic forecasting right, there was no way in the world those residuals were going to be met,' said CNW analyst Art Spinella.
CNW estimates that 3.2 million leases expired last year. Using the bankers' association figure of $1,756 per unit, that implies residual losses for the whole industry of around $674 million.
CNW has a lower per-unit estimate for residual losses, but a higher estimate for vehicles returned to the lessor. CNW estimates a loss of $1,418 per vehicle, with an estimated 23 percent returns, or about 736,000 of the 3.2 million returns.
If 75 percent of those 736,000 generated a loss, using the bankers' association figure, that implies total industry residual losses of about $782 million.