By Jennifer Reed, Automotive Group Editor – Auto Remarketing
July 29, 2008

ATLANTA — Manheim Consulting’s chief economist Tom Webb recently discussed current market trends, including leasing, repossessions and more.

According to Webb, lease penetration rates, although not actual volumes, gained ground this year.

“In today’s market, it is easier to sell consumers on the advantage of avoiding the residual risk that is inherent in a retail finance contract,” Webb explained. “But what does this mean from the lessor’s standpoint? If the portfolio is not overly subvented and contains a good mix of vehicles, it should perform well.”
However, as Chrysler and Ford recently reported, their mix has been heavily on the side of larger vehicles, which many consumers are losing interest in. This means big hits on residuals.

For instance, Ford reported a $2.1 billion impairment charge last week, while Chrysler indicated that it is leaving the manufacturer-supported leasing market altogether in the U.S. and de-emphasizing leasing as an option in Canada. GMAC confirmed to Auto Remarketing Tuesday that it is halting manufacturer-supported leasing in Canada due to residual drops.

“Residuals on some of these products have moved down substantially,” Webb explained to Auto Remarketing late yesterday. “It is more difficult to put together attractive lease products.”

Basically, he said that no one in the marketplace expected the consumer shift toward smaller, more fuel-efficient units would have been as strong as it is. “Some companies adjusted to the market the best they could. Some pulled leases forward but prices continue to get hit,” he noted.

Looking ahead, Webb said residual losses will continue into next year. After 2009, he anticipates that these big residual hits will start to be mitigated.

However, he did not that pulling out of manufacturer-supported leasing completely, such as what Chrysler is doing in the U.S., can seriously hurt new-vehicle sales.

“Lease customers are much more loyal to the brand. They may end up with dissatisfied customers,” Webb stated. In fact, consumers who prefer to drive large SUVs and trucks tend to see themselves better off leasing and may not want to incur the risk of what these units’ resale values will be if they purchase instead of lease.

After dropping in 2006, off-lease volumes are climbing again in 2008 and expected to continue their growth into next year, Manheim reported.

Meanwhile, as off-lease volumes are rising, so, too, are repossessions. Essentially, Webb said that these units are reaching “peak levels” in 2008. The industry is undergoing a correction, though, and Webb foresees a reduction in the volume of repossessions into 2009.

“Auto lenders have been on the front lines of both deteriorating economic environment, which has led to higher delinquency rates, and the credit crisis, which has increased the cost of (or reduced the availability of) new funds for originations,” he said.

“The result has been higher default rates, lower recovery rates on repossessions, a tightening of lending standards and substantial slowing of originations. This has set the stage for repossession volumes to fall in 2009,” Webb continued.

Going forward, he doesn’t expect auto lenders to loosen underwriting standards again for quite a while. At least until the economy recovers.

Continuing on, the report went on to indicate that new-vehicle sales into the commercial and government fleet industry climbed to 1 million units in both 2006 and 2007, but Webb said they are, “set to fall to less than 930,000 in 2008 based on the 7.2-percent decline in sales in the first half of the year.

“End-of-service fleet volumes are, however, based on past sales, and as a result will continue to rise in 2009 and 2010,” he concluded.