The boom in leasing that propelled the auto market to sales records shows signs of fizzling out, as auto companies' finance subsidiaries and other lenders confront some discouraging financial facts, according to a Dec. 15 story by Micheline Maynard in The New York Times.

Short-term discount leases that made cars affordable for many consumers who could not handle high monthly payments are disappearing fast, according to Maynard's story. Big banks and finance companies are backing out of the lease business, burned by lower-than-expected values for vehicles returned by customers when their leases are up.

Those projected values, called residuals, have often been set higher than the actual value of the cars and trucks returned when the leases end. Artificially high residuals are commonly used to make leases more affordable, since the monthly payment is typically calculated on the difference between the residual and the purchase price. The higher the residual, the lower the payments (and the easier the sale).

Artificially high residuals pose benefits, not risk to consumers, but as recent events have shown, they can be very costly to financial institutions that write leases and then must sell vehicles, when they are returned, for less than they are valued on the books.

"The market has fundamentally changed," George Borst, chief executive of Toyota Financial Services, told Maynard. "The free ride on leasing has come to an end."

Leasing for personal use has dropped to 29 percent of the car market this year, from 32.5 percent last year, according to CNW Marketing/Research of Bandon, Ore.

Collectively, lenders will lose an estimated $10.4 billion this year because they overestimated how much cars and trucks would be worth at the end of their lease terms, according to Maynard's story. According to CNW's Art Spinella, that figure could climb to $11.1 billion in 2001.

In 1999, lenders lost money on 84 percent of the formerly leased cars when they were subsequently sold as used cars at auction or by dealers, according to the Consumer Bankers Association (CBA). The average loss was $1,920 per car according to CBA estimates.

Those losses are scaring off some big lessors, including two just this month. GE Capital Auto Financial Services stopped accepting lease applications as of Dec. 1. One of DaimlerChrysler's semi-independent financing units, Roanoke, Texas-based debis Affinity, told dealers last week that it would no longer write leases and that they would instead have to go to the auto finance divisions of Mercedes-Benz and Chrysler.

First Union, the nation's sixth-largest bank company, quit the lease business almost 18 months ago. Bank of America and the Bank One Corporation have also scaled back leasing.

Some industry analysts expect the leasing business, which has hovered around 30 percent of the market for five years, to drop as low as 18 percent next year.

Though leasing has long been available, its popularity is relatively new. Until the mid-1990's, only about 5 percent of consumers leased cars.

That suddenly changed in 1995, when Mercedes-Benz and the Ford Motor Company started offering attractive discount-leasing plans, hoping to persuade buyers to concentrate on low monthly payments instead of on high sticker prices. Consumers quickly took to the deals, and banks and other lenders jumped in.

The deals helped automakers to sustain an unprecedented sales streak, culminating in last year's record of 17.3 million units. Leasing contributed to the rise of SUVs; many consumers who could not afford loan payments on $30,000-plus trucks found they could handle monthly lease payments that were hundreds of dollars less.

But now, tools like inflated residuals, which sparked record sales in the late 1990s, have come back to bite the automakers, according to Maynard's story. In trying to backpedal, companies are finding how accustomed consumers have become to subvented lease offers. Case in point: in an effort to cut its expensive inducements, Chrysler halted lease deals on Jeep Grand Cherokees in May, and sales of that model collapsed.

Chrysler's approach has changed, according to Maynards story: instead of setting a high residual value for Grand Cherokees, the company is giving dealers an incentive of $2,750 per vehicle. That reduces a customer's lease payment without inflating the residual value.

With banks pulling back, it will be harder for consumers to comparison-shop, since they have fewer choices to scout. The typical lease customer compares deals from four financial institutions before choosing a package, according to Consumer Reports, which explores leasing in its January issue. Car shoppers have also used the Internet to find lease deals they otherwise might not know about, according to Maynard's story.

Dan Jarvis of Ford Motor Credit contends that moves by banks to stop writing leases actually help customers, because auto company financing arms are better equipped to assist them. Banks, he contends, rely primarily on residual values set by the Automotive Lease Guide.

Ford takes that guide's numbers into account, but also collects data from its dealers, who play a big role in clearing out formerly leased vehicles from their lots and can give the company snap information on the prices that customers are willing to pay, according to Maynard's story.

Ford Motor Credit finances roughly a million leases a year, about a quarter of Ford's American sales. Its leasing business is up slightly this year, according to CNW, and Jarvis told the New York Times he did not expect the numbers to drop next year.

But leasing has declined significantly at other companies, particularly Toyota. Two years ago, 60 percent of Lexus luxury vehicles and 35 percent of Toyotas were leased. This year, that has dropped to 35 percent for Lexus and 22 percent for Toyota. But according to Borst, deals will be available for the most desirable customers, particularly in the luxury market.

If demand becomes too sluggish, discount deals are likely to return in some form, most likely for short-term periods in regions where the offers are most needed to spur sales, according to Maynard's story.