The sticky wicket that is lease equity – The mission to achieve balance

I always love when Equifax publishes their lease equity tracking and COX Automotive shares it. Having been on multiple sides (leasing lender & also helping consumers/dealers buy their off lease vehicles) of balancing consumer’s interest, dealer’s wants, and your own well-being as a financial institution, it is interesting to see how it is trending. I also have some thoughts on where it may be going as we get into the next few years with a substantial drop in off lease product coming back.?

Off lease equity is certainly nothing new. We used to see it in the early 2000’s, just to a much lesser degree. In my early days in the banking business, I managed the call center that fielded calls from consumers and dealers with off lease cars. I remember when as a large leasing institution we started charging dealers market price for off lease cars in an equity position in 2002. It was not a well-received policy, to say the least, but the bank was facing high losses on 90%+ of the portfolio and those cars were always quickly given back, but dealers loved to snatch up the equity off lease product even then. Who could blame them if the bank was willing to let it go. I have always been a proponent of it being a true partnership with your dealer partners and it has to work fairly for both of you. We had dealers who did help us with off lease product that was upside down, but we had a lot more that were quick to say come and get it. It is critical to find middle ground and be willing to see both sides.

Long before the pandemic drove used car values through the roof and boosted off lease equity to record highs viewable on this slide below, I was always amazed how many leasing consumers turned in vehicles with substantial equity and even more surprising, how few dealers were on top of managing their off-lease portfolios to let it slide through undetected. Sure, there were dealers who managed it well, but they were in the minority to start. Millions of $$ dollars a year was literally left on the table throughout the industry due to a lack of understanding around lease end strategy, consumer options, and sometimes lack of awareness or initiative.?

Then COVID came along and brought mainstream media attention to used car values and the desire for lease end vehicles that suddenly were almost now always in a positive position. With the rise of YouTubers and auto buying experts coming fully into focus, attention on lease end equity became much more scrutinized by both consumers, dealers, manufactures, and lenders themselves. Many lenders and captive finance groups began doing what some large leasing banks had been doing for a while, charging market value to parties outside of the leasing consumer and/or the franchise dealers that originated the lease. Policies varied widely and still do, so it is hard to keep up with them all. I have helped a lot of consumers and dealers in recent years navigate some of those challenges as a consultant. It was both informative and intrinsically rewarding to be on the other side of the fence this time.

Balancing lease end equity is critical for OEM’s, captive finance companies, and leasing lenders. Some do it really well and others not so much. It is certainly more challenging for these institutions than it was even 10 years ago with the close involvement of both internal and external regulatory groups like the CFPB closely monitoring your policies and procedures. There is a fine line between educating consumers and encouraging them to do things that may not be financially advantageous for them. I have felt that pressure first hand and know it is not easy. However, in the last few years, I have seen opportunities to capture more equity and still be fair to both your customer and valuable dealers pass by. There are win-win opportunities for those who really understand their lease portfolios and have a clear-cut strategy well in advance.

In the most recent lease equity report, we can see lease equity starting to trail off as 2023 ends. That is really not surprising with used car values on the decline. However, there is more to that story. Some of it is mix related, too. We are starting to see off lease vehicles coming back that originated during COVID. What and how much was being leased changed quite a bit. As used values started to rise and the market became imbalanced with supply and demand of both new & used vehicles, there was little need for the large captive lessors to offer leases when consumers were just as happy to buy a vehicle if they could find it and finance it at then low interest rates. Not to mention, predicting future residual values became a lot cloudier with market uncertainty at every turn. This smaller leasing trend has continued with lease penetration levels still at low levels.

The one thing that is certain though is that we won’t see a large volume of off lease cars in the next few years. We know that because as I always say, you make your bed in leasing for tomorrow in what you do today. And we have both not witnessed the sale of as many new cars due to supply issues and tied to that, not as many being leased. The future is set on volume and that is likely a plus for newer, used car values. However, what the lease mix & its consumer base was will determine the ultimate equity trend to a large degree and that may be different than it has looked for the last few years with vehicles leased before 2020. Sure, those vehicles will still probably be in decent positions overall, but there are going to be loss pockets beginning to emerge again, so I wouldn’t be surprised if we see lease equity being less of a factor. Lease end strategy once again will play a key role in who wins and loses though, but that is part of the fun of being in the leasing game for those with the iron stomachs to do it and reap its rewards for staying the course through the ups and downs.?

#remarketing #leaseend #leaseendequity #vehicleleasing #automotivefinancestrategy

About the author:

Jason Herman is a 24-year veteran in the remarketing and automotive finance world and an avid car enthusiast. Having managed bank and fleet lease end operations, 1st?and 3rd?party remarketing, residual value setting & risk mitigation, and the sale of well over 1 million off lease & repossessed vehicles in his career, he enjoys providing guidance and expertise to both those new to and experienced in the automotive finance industry, as well as helping end consumers purchase or sell vehicles. Should he be able to help, Jason can be reached at [email protected] .

Please check out my automotive finance & car buying blog: https://www.carguy4u.com/car-buying-and-auto-finance-blog