Charge-Offs for Bad Loans Slicing Into Ford Profit

The celebration surrounding Ford Motor Co.'s surprise first-quarter profit shouldn't drown out a couple of somber notes for ordinary consumers, within the quarterly results for finance arm Ford Credit, which makes car loans and leases. The results show a higher number of consumer loans gone bad. That's bad news for the U.S. economy, since consumer spending until recently has been keeping the economy going. These are not high-risk, subprime customers, either. Ford Credit's customers are overwhelmingly in the prime-risk category.

But on April 24, Ford Credit said it more than doubled the amount of charge-offs for bad loans in the first quarter of 2008, from $105 million to $227 million. That's still only 0.65% of its total receivables. That's not even close to a dire situation for Ford Credit, but it's a sign of the times for consumers. Ford Credit also hiked its allowance for future credit losses from $1 billion to $1.2 billion. Overall, Ford Credit net income fell from $193 million in the year-ago quarter to $24 million.

Ford Credit also experienced lower-than-expected values for vehicles coming back from leases, by $200 million. That's bad for Ford, and it's bad for new-vehicle consumers. If there's a silver lining, it's for used-car buyers. Lease customers in effect borrow the difference between the up-front cost of a vehicle, and how much it is predicted to be worth at the end of the lease, known as the residual value. At the end of a lease, Ford Credit takes back most off-lease vehicles and re-sells them at wholesale auctions.

If the actual auction value of an off-lease vehicle is less than Ford Credit expected, that costs Ford Credit money when the vehicle is auctioned. Lower actual values today also depress predicted residual values for three or four years from now. And that raises lease payments for today's consumers, since there's a wider gap between the up-front cost and a lower residual value.