Higher Used-Car Prices Improve Prospects For Auto Lenders
20 März 2009 - 9:03PM
Dow Jones News
In January, the going rate for a 2007 model of the Ford Explorer
was $11,600. In March, the same make is listed at $13,850. And that
change gives auto dealer Jeff Liccardi reason to smile.
"I think the worst is over," says Liccardi, a third-generation
auto dealer who sells new and used Ford vehicles in Watchung,
N.J.
Used cars are rising in value as budget-conscious U.S. consumers
flock to this segment of the market amid an economic slump. This is
good for dealerships, like Liccardi's, because it boosts the value
of their stockpiles of used cars. It also brings relief to lenders
of auto loans and leases at a time when the auto industry is
struggling to make ends meet amid tumbling sales of new cars.
Falling used vehicle prices fueled by $4-a-gallon gasoline in
the midst of a weakening economy were responsible for substantial
red ink in lenders' books last year, forcing them to scale back or
eliminate leasing altogether.
GMAC LLC, the lending arm of General Motors Corp. (GM), took a
$1.2 billion impairment charge on its operating lease portfolio
last year. Similarly, rival Ford Motor Credit, the financing arm of
Ford Motor Co. (F), took a $2.1 billion write-down in 2008 related
to unprofitable lease deals. Privately owned Chrysler LLC's
Chrysler Financial pulled out of the leasing market in July.
Prices on used vehicles rose 7.7% in February from December,
according to the Manheim Used Vehicle Value Index.
"They are very significant increases," says Tom Webb, chief
economist at Manheim, the largest U.S. wholesale auction company
that sells and buys used cars to and from dealers.
Values on used cars matter a great deal. After leases expire,
lenders take the vehicles back and sell them at used-car auctions,
hopefully at a profit. But falling resale values force lenders -
saddled with inventories of thousands of these vehicles as they
come off leases or are repossessed from owners unable to keep up
with payments - to sell them at a loss.
Higher values on used cars "relieve some pressure on lease
portfolios of the auto finance companies because it reduces the
risk of further impairment charges on operating lease assets," says
Mark Wasden, an analyst at Moody's Investors Service.
GMAC had $26.4 billion in operating lease assets on its books as
of Dec. 31, 2008; Ford Credit had $22.5 billion.
Used vehicle "prices are up as much as $1,600 per vehicle
compared with December," says Michael Stoller, a GMAC spokesman.
"It's a positive in terms of revenue. It improves proceeds from
vehicle auctions."
Higher values also have "a positive effect" on the amount
recovered from a repossessed vehicle, says Meredith Libbey, a Ford
Credit spokeswoman.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com