The American Spectator

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The Other Shoe Drops

By Eric Peters on 10.15.08 @ 6:06AM

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?

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