Auto Leasing Sours

Not long ago, sport-utility vehicles (SUVs) were a "hot" item in the market. Consumers rushed to lease them, and banks and finance companies accommodated the demand. The problem is that leases are expiring, SUVs are pouring back into the market, and we have a slowing economy. As a result, used-SUV prices are well below the prices anticipated two or three years ago. In their article in the Wall Street Journal, Jathon Sapsford and Norihiko Shirouzu cite as an example a bank that had purchased a Ford Explorer on a three-year lease for about $30,000 in 1998. At the time, guidebooks predicted that the market value of that model in three years would be $15,525. Unfortunately, with the lowered popularity of SUVs, a record number of SUVs were coming off lease in a soft economy. As a result, this model was selling for $14,090, nine percent below the expected market price. J. P. Morgan and some other banks managed to hedge their lease portfolios with derivatives, but others are tallying heavy losses.