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Management’s Discussion and Analysis of Financial Condition and Results of Operations
34 Ford Motor Company | 2009 Annual Report
dealer loan default assumptions compared with historical trends used in Ford Credit's models. At December 31, 2008,
Ford Credit's allowance for credit losses included about $210 million, which was based on management's judgment
regarding higher severity assumptions. The credit quality of Ford Credit's retail and lease originations remains high. For
additional discussion, see "Critical Accounting Estimates – Allowance for Credit Losses."
In purchasing retail finance and lease contracts, Ford Credit uses a proprietary scoring system that classifies contracts
using several factors, such as credit bureau information, credit bureau scores (e.g., FICO score), customer characteristics,
and contract characteristics. In addition to Ford Credit's proprietary scoring system, it considers other factors, such as
employment history, financial stability, and capacity to pay. As of December 31, 2009, about 5% of the outstanding U.S.
retail finance and lease contracts in Ford Credit's serviced portfolio were classified as high risk at contract inception,
slightly higher than year-end 2008 of about 4%. This increase primarily reflects a lower percentage of lease contracts in
Ford Credit's retail portfolio. Lease contracts generally include shorter average terms and higher average FICO scores
compared with retail installment sale contracts.
Residual Risk
Ford Credit is exposed to residual risk on operating leases and similar balloon payment products where the customer
may return the financed vehicle to Ford Credit. Residual risk is the possibility that the amount Ford Credit obtains from
returned vehicles will be less than its estimate of the expected residual value for the vehicle. Ford Credit estimates the
expected residual value by evaluating recent auction values, return volumes for its leased vehicles, industry-wide used
vehicle prices, marketing incentive plans, and vehicle quality data. For additional discussion, see "Critical Accounting
Estimates – Accumulated Depreciation on Vehicles Subject to Operating Leases."
North America Retail Operating Lease Experience
Ford Credit uses various statistics to monitor its residual risk:
• Placement volume measures the number of leases Ford Credit purchases in a given period;
• Termination volume measures the number of vehicles for which the lease has ended in the given period; and
• Return volume reflects the number of vehicles returned to Ford Credit by customers at lease-end.
The following table shows operating lease placement, termination, and return volumes for Ford Credit's North America
operations, which accounted for about 98% of its total investment in operating leases at December 31, 2009 (in thousands,
except for percentages):
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In 2009, placement volumes were down 250,000 units compared with 2008, primarily reflecting changes in our
marketing programs that emphasized retail installment sale contracts, lower industry volumes, and the transition of Jaguar
Land Rover and Mazda financing to other providers. Termination volumes increased by 5,000 units compared with last
year, reflecting higher placement volumes in 2006 and 2007. Return volumes decreased 13,000 units compared with last
year, primarily reflecting lower return rates, consistent with improved auction values relative to Ford Credit's expectations
of lease-end values at the time of contract purchase.