Ouch! Residual losses are the worst in seven years

Overinflated residual forecast rates on leased vehicles hit a seven-year peak, and providers are moving to reduce their risk and resultant losses on off-lease units.

Bank One has become the latest provider to back off two-year leases, for example.

The 24-month leases or variations thereof, such as 18 or 27 months, were popular the mid-1990s, but too many lessors found that quicker turnbacks of units left them with depreciation losses far below estimated market prices.

"A 24-month lease is just a rental," says Valerie Torphy, senior vice president of R.V.I. America Insurance Co., which insures against residual losses. "Lessors aren't making money off those vehicles when they come back. That's why some banks don't do 24-month leases anymore."

Losses on some sport-utility vehicles have surpassed $9,000, says the Association of Consumer Vehicle Lessors, and in 1999, the average loss per leased vehicle reached the highest total since 1993 - $2,592.

Losses are the difference between a forecasted residual value and the actual value of the vehicle when it comes off lease.

"Even against a background of record-setting sales," says Ronald Loshin, analyst for Bank Lease Consultants, "the unprecedented new-car stability over the past five years caught the leasing industry by surprise."

Another factor in the lease residual picture has been the peak rates of vehicles coming off lease - more than three million both this year and last.

The lease share has remained constant at about 30% of total new-vehicle sales, but re-leasing of pre-owned vehicles has begun to increase - slower than at first predicted - but nevertheless adding more units to be appraised for estimated residual values.

Banks, leasing firms and captive finance companies are stepping up marketing efforts to refinance or sell off-lease vehicles to lessees or dealers at reduced prices.

But that strategy is somewhat tempered by more affordable used units staying on dealer lots or sold at bargain prices, warns Mr. Loshin.