Leased vehicle residual losses are taking their toll in the first half of the 2001 model year.

At least six “independents” have dropped out of the business or cut back sharply. For parent automakers' “captive” leasing firms, that means less competition. But the captives are still struggling with major residual losses.

The situation on residuals is regarded by industry insiders as “the worst” in seven years and more independents could call it quits, says Thomas McAlear, chief operating officer of DaimlerChrysler Services.

Debis, DC's sister lender serving non-DC brands, left the field last year, but DC itself “is here to stay, because we are committed to supporting our home brands and their dealers,” declares Mr. McAlear.

So severe has the overestimation of leased-car values become that Debis is joined in flight from vehicle leasing by such deep-pocket providers as GE Capital Auto Financial Services and the First Union and National City banks. Two other national banks which have reduced their leasing portfolios are Bank One and Bank of America.

Extending the late-2000 slide into the current year, industry bible Automotive Lease Guide again reduced residual values effective with leases begun in January while lease incentives were narrowed drastically from 2000-model levels.

Up to three to four percentage points of MSRP prices were stripped from residual values affixed on SUVs leased in early 2001, compared to a year ago on 2000 models.

Leasing companies predict the residual value — what a car will be worth when it comes off lease in three or four years. The higher the forecasted value, the lower the customer's leasing payments. But financial woes occur when the predicted residual value is more than actual value at the end of the lease. Leasing companies take a remarketing hit when they take possession of an over-valued vehicle.

To try to avoid that, some leasing firms have lately gone the other way — conservatively forecasting residuals. That, in turn, drives up lease payments.

Moreover, auto companies, in order to spur outright sales, are backing off bargain lease rates. There's a question whether that strategy backfired, resulting in many consumers neither leasing nor buying for the time being.

Dealership groups' executives, reporting their 2000 financial results, agree that absence of “cheap” monthly lease payments contributed to December's sales plunge.

Lower loan interest-rate incentives were being offered instead by Big Three captives and banks, with four-figure down payments sought on most leases.

Bank One added $225 million in the fourth quarter to its reserves to cover residual losses. Meanwhile, GE Capital in a major surprise stopped accepting lease applications as of Dec. 1.

A Consumer Bankers Association survey says lessors lost money on 84% of full-term off-lease vehicles returned to them in 1999, up from 71% in 1998. The average loss in 1999 of $1,920 per unit increased from $1,185 the previous year.

That 2000 losses were even higher on the eve of a 3.3-million off-lease vehicle pool estimated for 2001 was evidenced by the agenda of the annual Conference of Automotive Remarketing, set for March 19-21 in Las Vegas.

The forum is entitled, “What can the automotive industry do about the worst vehicle lease residual losses in the past seven years?”

The topic of Remarketing Services of America President Stuart Angert planned address is “Will lease losses drive banks and lease funders out of the market — and so what?”

Mr. Angert chose his topic after First Union started the leasing flight last summer, to be followed by other “heavy hitters” such as one-time industry giant GE Capital.

Privately, many bank executives involved in the decision to exit the field say captive lenders had become too “competitive” and insistent that dealers stay loyal to their automakers' financial services arms.

A keynote speaker at the remarketing conference will be NADA Chairman Robert J. Maguire, a Chevrolet, Saturn and Nissan dealer in Bordentown, NJ. He will discuss “What dealers really want and need from remarketing distributors and auctions.”