Ford's Finance Arm Tightens Lease Terms on Trucks, SUVs
>>>Just another "virtuous" cycle turned "vicious."<<<
By JOHN D. STOLL and MATTHEW DOLAN
July 29, 2008 12:30 p.m.
Ford Motor Co. has informed dealers that it is raising the price on leases of its most profitable trucks and sport-utility vehicles due to the "extreme losses" its lending arm is taking on these vehicles.
This move is expected to make several 2008 model year trucks and SUVs "lease proof," according to the company. In other words, prices will be so high on these leases that consumers won't be willing to agree to terms, according to a dealer briefed on the matter.
In a memo sent via email Monday, Ford officials informed dealers "due to extreme losses Ford Credit is taking on off-lease vehicles, it will be necessary for Ford Motor Credit Company to adjust residuals mid-quarter on the following vehicle lines." The memo was obtained by The Wall Street Journal.
Off-lease vehicles are vehicles that come back to the dealer after a lease has expired. Typical leases run between 24 months and 36 months, although some leases extend longer than that.
"Our business plan always includes a certain amount of leasing to support Ford sales," Ford Credit spokeswoman Brenda Hines said Tuesday. "We don't publicly discuss our leasing forecast."
The changes are effective Aug. 1, affecting the Ford F-150 and Super Duty pickups, and the Ford Explorer and Sport Trac SUVs.
"If you have any customers that want to lease any of [the affected] vehicles, the time is now," the memo said.
Ford's move comes as its key competitors -- Chrysler LLC and General Motors Corp. -- are also tightening vehicle-leasing terms, or backing away from the practice altogether. Chrysler said Friday that its credit arm, Chrysler Financial, will stop financing leases, while GMAC LLC, minority owned by GM, will stop subsidizing leases in Canada.
Actions at GMAC and Chrysler Financial take effect Aug. 1.
Domestic auto makers have been forced to revisit their strategy on leasing due to plummeting resale values of trucks and SUVs, which have long been Detroit's best-selling and highest profit models. As consumers abandon those segments due to high gasoline prices, the resale value on used models has sunk.
This hurts vehicle-leasing because terms of leases are based on an assumed resale value of a vehicle when the lease expires. If the value of the vehicle being leased should fall more than expected, auto lenders are forced to eat big losses.
Last week, Ford Credit booked a $2.1 billion charge for the second quarter related to money-losing leases. GMAC will report earnings Thursday, and could also book deep losses related to leasing given its heavy exposure to truck and SUV leases.
During a conference call last week, Ford said that in the second quarter, auction values for 24- and 36-month lease vehicles were down, on average, about $2,700 per unit and $2,400 per unit, respectively, from a year ago levels. |
