The Detroit Big Three's own version of holding mortgages to (SUV)
McMansions of imploding resale value.
Another kick in the nether regions is about to befall
Detroit -- in the form of hundreds of millions of dollars worth
of imploding resale values of leased trucks and SUVs.
These vehicles -- leased 2-3 years ago when it was still possible
to fill up a V-8 SUV for $40 or so and when people's homes were
still worth something and they had reasonably secure jobs -- are
about to come home to roost. Hundreds of thousands of them, most
not worth anywhere near what the finance guys who wrote the
leases thought they'd be worth today.
Remember: With a lease, you're paying the difference between the
vehicle's sale price and what the lease issuer estimates
it will be worth at the end of the lease (the so-called "residual
value"). So, if you leased, say, a new Escalade with a sticker
price of $60,000 that the finance guys doing the lease contract
figured would be worth $39,000 three years down the road, your
lease contract is based on the $21k.
Assuming that the value of that Escalade holds, everyone
wins.
The person taking out the lease gets to drive a much more
expensive vehicle than he could otherwise afford to buy ($21,000
divided into three years' worth of monthly lease payments is a
helluva lot more manageable than a five-year loan on $60k). And
he gets to drive a new vehicle every three years or so.
Sweet!
The automakers are happy, too -- because their expensive products
are more accessible. People who might not buy -- or be
able to buy -- can lease. That helps "move product" and
keeps the production lines humming.
And the lease people (and dealers) enjoy a nice turnaround when
the off-lease vehicles come back to be resold.
That is, when everything works like it's supposed to.
But what happens when assumed residual values crash
through the floor? When that $60k Escalade isn't worth $39,000
three years later -- but only $25,000?
That's what is happening right now. Residual/resale values of big
SUVs and pick-ups are tanking. But the (much higher) anticipated
residual values were locked in 2-3 years ago, when the leases
were issued. The people bringing their suddenly worthless trucks
and SUVs back at lease end are not left holding the bag, though.
The industry is.
HOW MUCH LIABILITY are we talking about? No one has an exact
number, but when a brand-new Dodge Ram 1500 is being "sold" for
40 percent off MSRP sticker, you get a sense of the magnitude of
the financial tsunami that is breaking.
Chrysler Corp. -- what's left of it -- has already pulled out of
the leasing business completely. Which could mean The End, at
long miserable last. Business is already terrible; has been for
months. Take away leasing and you telegraph to the marketplace
that your vehicles are the rolling equivalent of a subprime
mortgage -- and who is buying those these days?
Eric Peters is an automotive columnist and author of Automotive Atrocities: The Cars You Love to Hate (Motor Books International) and a new book, Road Hogs.