While auto lease portfolios will experience substantial losses in the near-term, the long-term outlook is significantly better than one might expect, according to the J.D. Power Valuation Services COVID-19 Supplemental Report on the state of the used-vehicle market.

“There are currently 12 million active leases representing a combined value of more than $200 billion,” said Jonathan Banks, vice president of vehicle valuations & analytics, valuation services, J.D. Power.

The number—combined with massive declines in wholesale auction prices—has prompted many in the industry to speculate on how much lease portfolio losses will eventually cost captive finance companies.

“If one adds up the entire inventory of leases that have yet to reach maturity, industry-wide portfolio losses reach $10 billion when used-vehicle wholesale prices fall 5 percent below pre-virus expectations. That number soars to $31 billion if prices sink 15 percent lower than expected,” added Banks. 

However, not all leases reach maturity at the same time. Most leases are on 36-month terms, which means that the inventory will roll into the market in a staggered manner over the months and years to come. 

“We expect used wholesale prices to slowly recover from their depressed levels as stay-at-home orders are relaxed and the economy improves. This means that the real virus-related risk to lease portfolios is associated with near-term lease maturities rather than leases that will mature in 2021 and beyond,” Banks said.

J.D. Power calculates that industry-wide lease portfolio losses reached $460 million in March 2020. Over the course of the second quarter, softer than anticipated wholesale prices will result in industry-wide losses of approximately $1.7 billion.  “After that we expect the curve to bend. By the third quarter, we expect to see $1.1 billion in losses, followed by $364 million in losses in the fourth quarter. In the end, we expect 2020 lease portfolio losses to reach $3.6 billion,” Banks said.

Moving into 2021, J.D. Power anticipates a recovery in demand to combine with a constrained used-vehicle supply to support the long-term stability of lease portfolios.