GMAC LLC, the captive financing arm of General Motors Corp., will scrutinize the future of its entire North American auto-finance business after plunging residual values on gas-guzzling trucks contribute to a second-quarter loss of $717 million to its auto business.

The loss, which compares with a profit of $395 million in like-2007, includes an impairment charge of $716 million related to its lease portfolio and reflects a low-point in quarterly automotive results for the company dating back eight consecutive reporting periods.

“We are taking this opportunity to review our entire (vehicle) leasing and lending business – the entire product suite in North America,” says Robert Hull, GMAC’s chief financial officer.

With the impairment charge, GMAC suggests the present value of its $30 billion North American lease portfolio is substantially greater than the amount it expects to recover once the vehicles are returned for resale.

“SUVs have fallen well below original expectation,” Hull says during a conference call today with journalists and Wall Street analysts. “Nearly all of the impairment was related to SUVs – no surprise.”

In June, for example, GMAC recovered only 75% of the value it expected from SUVs coming off lease. Pickups also declined, although not as sharply, and passenger cars mostly were flat vs. the company’s original expectations.

Pickups and SUVs represent about $18 billion of the company’s $30 billion lease portfolio in North America.

Nearly the entire impairment charge comes from leases originating in the U.S., with Canada representing just 3%.

GMAC said July 29 it would suspend incentivized leasing in Canada due to significantly lower residual values this year on pickups and SUVs. The incentives include reduced initial payments and lower interest rates.

Residual values on trucks have fallen as a result of a rapid consumer shift this year away from pickups and SUVs to more fuel-efficient passenger cars in the face of high gas prices.

Automotive Lease Guide Inc., a key provider of residual-value forecasting to the auto industry, significantly repositioned its forecast July 28 by reducing the expected resale value on trucks by 8.5 percentage points and raising the anticipated return on cars with high fuel economy by an average of five percentage points.

In addition to its actions in Canada, GMAC says it will terminate its SmartBuy program, a purchase transaction that, similar to a lease, offers lower monthly payments but includes a balloon payment at the end.

GMAC also plans to reduce the volume of new lease originations in the U.S., largely through product and pricing refinement, Hull says.

Additionally, the company will raise prices on other auto-financing programs, explore ways to originate more leases through its banking unit and implement a purchase program to motivate lessees to buy the vehicle at the end of their contract.

George Magliano, director of automotive research and forecasting-Americas at Global Insight Inc., says auto makers will feel the pinch of cutbacks in leasing by finance companies.

Chrysler Financial, the financing arm of Chrysler LLC, announced last week it would terminate its leasing business. Ford Motor Co., American Honda Co. Ltd. and BMW of North America LLC also have made news recently by taking financial impairments against their leasing portfolios.

“In the short-run, it’s not good,” Magliano says. “Not having the leasing option available, or terms so onerous people won’t lease, is going to hurt sales volumes. Auto makers won’t entice all these people looking to lease, or turning in their lease, to buy through low-interest loans and rebates. They’ll go elsewhere if they can.”

Magliano speculates 0.0% down and 0.0% financing terms over an extended period also may be in jeopardy.

GMAC says GM, which sold a 51% stake in the lender two years ago to an investment consortium led by Cerberus Capital Management LP, likely will shoulder up to $1.5 billion of future impairments to the company’s lease portfolio.

GM already has provided $350 million to GMAC as part of a risk-sharing agreement. The auto maker reports its second-quarter earnings tomorrow (Aug. 1), and analysts expect weak results due to the shift in product mix from trucks to cars and an overall slower vehicle-sales market.

GMAC further reports lease originations declined in the second quarter to $12.4 billion from year-ago’s $14 billion.

“The U.S. economy continues to soften and with it auto sales,” Hull says. “Consumer credit is weak, and we see this even in the highest credit tiers of our auto business. Home prices remain under pressure, and residential builders are struggling.

“Record fuel prices are pummeling used-vehicle prices and, on top this, the capital and credit markets remain disruptive. We see no signs of it blowing over.”

However, Hull indicates GMAC does not intend to entirely suspend or terminate its lease business with GM.

“We stopped leasing in Canada. We stopped selling our SmartBuy, and we’re going to be reducing lease volumes in the United States,” he says.

“So assume there is a lower availability of leased product in the market over time, (but) we have no intention (of shutting it down). We intend to support GM going forward within the realm of our liquidity capacity.”

Hull also reports a decline in 30-day delinquency rates to 2.18% in the quarter from 2.37% year-ago, due mostly to intensified collection activities and tighter underwriting.

But he declines comment on news GMAC may merge its auto-finance business with Chrysler Financial.

“There’s been plenty of speculation about Chrysler Financial and GMAC, because of some common ownership through Cerberus, and we simply cannot comment on that transaction at this time,” Hull says.

GMAC’s overall loss of $2.48 billion in the second quarter compares with a profit of $293 million in like-2007. Losses at the lender’s mortgage unit, Residential Capital LLC, grew to $1.86 billion from a loss of $254 million last year, as the housing market continues its struggles.

jamend@wardsauto.com