GE Capital Auto Financial Services pulled the plug on its U.S. auto loan and lease business last week, continuing the stampede of auto lenders to the storm cellar.
The move was the latest in a growing series of exits and cutbacks in the auto finance industry.
'We wish you every success in the future,' said President Dan Henson in a Wednesday, Nov. 29, letter telling auto dealers GE Capital would stop accepting applications effective Dec. 1.
The departure of GE Capital and other lenders means that captive finance companies such as DaimlerChrysler Financial Services (which is changing its name to DaimlerChrysler Services), Ford Motor Credit Co., and General Motors Acceptance Corp. are likely to get more retail lease and loan business.
In a quieter move with potentially bigger consequences, the Automotive Lease Guide sharply cut residual values that take effect on leases begun in January 2001. The Guide is the most widely used benchmark for residual values.
The reductions in residual values were prompted by an 'unprecedented' level of new-vehicle incentives so early in the 2001 model year, said Raj Sundaram, vice president of Automotive Lease Guide. New-vehicle incentives cut the value of used models by a similar amount.
The publication cut the average residual for compact and full-sized sport-utilities by as much as 31/2 percentage points of the manufacturer's suggested retail price, compared with the residual value of leases originated in November and December, Sundaram said. For compact sport-utilities, the average residual has been cut to 44 percent of sticker price on a 36-month lease. For full-sized sport-utilities, the average has been cut to 52 percent of sticker. The January-February 2001 residuals for compact and full-sized sport-utilities are lower than year-ago levels by about 61/2 percentage points of sticker price, he said. On a $20,000 vehicle, that is a $1,300 difference, year-over-year. On a $30,000 sticker, it's a $1,950 difference. That gives leasing companies three unpleasant choices:
1. Force customers to pay more because the lease customer in effect borrows the difference between the up-front cost and the residual. A lower residual means a higher monthly payment.
2. Raise lease incentives to cover the difference. Leasing companies such as GE Capital already are being badly burned on the value of off-lease vehicles, which are often worth less than the residual value baked into the lease. That generates a loss for cars that are sold at wholesale auctions.
3. Ignore the Automotive Lease Guide residuals - which amounts to picking No. 2.
Lessors lost money on 84 percent of the full-term, off-lease vehicles returned to them in 1999, up from losses on 71 percent of full-term leases in 1998, according to a Consumer Bankers Association survey. The average loss also worsened: $1,920 per vehicle in 1999, vs. $1,185 in 1998, the poll said. Citing losses on residual values, other big auto lenders have also disclosed cutbacks in recent months. They include Bank of America and Bank One Corp. First Union Corp. abandoned dealer-based auto lending last year. GE Capital, which is based in Barrington, Ill., had been cutting back its auto finance business for two years.
Its present auto finance portfolio of about 500,000 contracts is about one-third each retail loans, new-vehicle leases and used-vehicle leases, said spokesman John Oliver. He refused to say how much the portfolio was worth. Only a couple of years ago, GE Capital was one of the nation's biggest auto lenders outside the captive finance companies with an estimated worldwide auto portfolio of more than $25 billion.
Oliver said GE Capital's auto finance operations in the rest of the world are not affected by last week's announcement.
Tom McAlear, COO of DaimlerChrysler Financial Services said the drop in residual values may force out even more lenders. 'GE Capital is just the latest in a bunch of banks and indirect lenders that have elected to withdraw from the leasing business, and some have gone so far as to get out of retail,' he said.
Despite the instability of residual values, captive finance companies must stay in the lease and loan business to support factory marketing efforts. Said McAlear: 'We are here to stay.'