Auto lease securitization pools could see residual values rise as lenders compete to attract borrowers in a slowing market, according to a Moody’s Investor Service report.

Higher residual values can lower a lessee’s monthly payment. Moody’s believes that as the growth in lease sales slows down, lenders will intensify efforts to attract business from a shrinking pool of potential lessees.

“In such an environment lenders will be tempted to set residual value aggressively to cut monthly payments,” said Moody’s analysts in the report.

Higher residual values can amplify the losses to ABS transactions if used vehicle prices were to decline sharply. But Moody’s noted that higher residual values are typically matched by higher levels of credit enhancement for auto lease ABS deals.

“Residual value setting has risen from a year ago,” said Moody’s. “Nevertheless lease ABS have not yet entirely incorporated the lagged effects on ABS pools from increased competition because issuers typically season their originations before includeing them in lease ABS collateral pools.”

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