You’ll need a good credit score, 20 percent down and proof of income and debt to fight the crunch
Credit crunch? What credit crunch? If a dealer has a buyer, banks have money to lend — but with caveats. A buyer must be well-qualified and be able to prove it. And the terms will be tougher than they used to be.
The days of easy money are over.
“The no-doc [documentation], low-doc, preapproved loans have pretty much disappeared, except for a couple of banks,” says James A. Coburn, vice president of Flagstar Bank of Troy, Mich., and president of the National Marine Bankers Association.
Banks don’t just take your word anymore. They want proof you can afford the boat — documentation of income and debt and liquidity.
One-hundred percent financing is history, too, as are the low credit scores some lenders accepted to drive up the volume of entry-level, small-boat loans.
“Back to the future”
Though the universe of buyers is smaller in this brave new world, it’s probably not a bad one to live in, says Daniel Hunt, president of Boat World of Florida, a Stamas, Regulator and Key West dealer in Pompano Beach, Fla. “If you’re going to buy a boat, you have to be able to afford to make the payments,” he says. “[Violating that principle] is what brought us to this point. We’re getting back to the old days. You have to be able to afford to go boating.”
“The banks have tightened it up,” agrees Coburn, whose industry has taken a lot of criticism for the subprime home loans that helped precipitate the financial crisis and recession. He uses the term “back to the future” to describe this new reality.
“The credit underwriting guidelines are getting back to where they were 15 to 20 years ago,” he says. Yet it bears repeating: Money is available for boat loans.
The great myth of the financial crisis is there’s no money to lend, says Jeff Johnson, president of Maritime Finance LLC, a Fort Lauderdale, Fla., service company that helps boat buyers obtain loans. “That’s totally wrong,” he says. “Banks are still in this business. They are lending money. Definitely, there’s credit available.”
What you’ll need
Though different banks stress different qualifiers and set different guidelines in today’s economic climate, the trends are pretty clear.
• Credit score: It’s got to be good. “It used to be that [a score of] 675 would get you almost anything,” says Phil Keeter, president of the Marine Retailers Association of America in Oak Park, Ill. “Now you’re looking at 715 to 720.” Coburn says that in the easy-money days some lenders were approving loans to buyers with scores under 640 — even as low as the upper 500s. “That’s a high risk,” he says. “That’s subprime lending.”
• Down payment: Expect to put down 20 percent of the sales price, including tax and add-ons, says Ryder. For smaller loans — less than $50,000, say, for a 20-foot bowrider — the down payment could be 25 to 30 percent, he says.
• Term: Fifteen to 20 years still is typical for larger loans. In small boats, 7 to 10 years is more common, says dealer Hunt. With shorter terms, “You can get someone a loan, but their payments are going to be higher,” he says.
• Income, debt and liquidity: Credit scores don’t always keep pace with the changes in people’s finances in these fluid times, so some lenders are de-emphasizing credit scores and looking more closely at the hard numbers, says Peggy Bodenreider, a loan specialist with Maritime Capital Group of Fort Lauderdale and Capistrano Beach, Calif. Banks are looking at borrowers’ income, their stability — how long they’ve been working at their jobs, their asset base and liquidity. They are asking for documentation — hard proof — of a borrower’s financial condition. “It’s back to basics,” she says.
• Debt-to-income ratio: In the easy-money days, some lenders were accepting a ratio — that is, debt as a percentage of income — of 45, 50 even 55 percent, says Coburn. “That will drop to the high 30s,” he predicts.
• Interest rate: Many lenders in January were quoting rates of 6.99 to 7.50 percent for loans $50,000 or greater, and 7.99 to 9.5 percent for smaller loans, depending on the term. Variable-rate loans — much maligned in the subprime lending crisis — still were available, some lenders quoting 2 percent above prime, or about 6 percent for large, long-term loans, says Johnson, president of Maritime Finance. “The variable rates have come down as the prime has come down,” he says.
Historically, the low- to mid-7-percent range is a “pretty good rate,” says Don Parkhurst, senior vice president for marine and recreational vehicle finance at SunTrust Bank. He thinks boat loan rates could fall further into “the 6s” as early as this spring as federal TARP (Troubled Assets Relief Program) money gets banks lending to each other again, reducing the cost of money. “We’re already seeing that occur,” Parkhurst says, with home mortgage rates falling from 6 percent to around 5 percent in December. “I think this will spill over into all types of lending.”
What all this means is dealers no longer have the flexibility to adjust down payments and terms to bring a monthly loan payment down to a level a buyer can afford, says Keeter. In other words, the dealer’s universe of potential buyers is shrinking.
Marginally qualified buyers aren’t in the game anymore. Dealers in small, entry-level boats who tapped buyers with 600 to 620 credit scores probably will suffer the most, Coburn says. Dealers and buyers alike are going to have to rethink their plans. Dealers are going to have to do a better job of weeding out unqualified buyers; buyers are going to have to scale back their aspirations and buy a boat they can afford.
“The customer has to sit down at the kitchen table and write out a balance sheet,” says Coburn. “This is what’s coming in; this is what’s going out. This is the monthly payment we can [realistically] afford.”
Several key players — Key Recreation Lending, GE Money, Citizens Bank, Wachovia Bank and National City Bank — have pulled out of the boat loan market, and this has caused some dislocations, particularly for dealers who handled the financing for their customers and relied on those banks exclusively for loans. The dealers who followed that business model still feel like they were left in the lurch, but the reality is plenty of financing is available — for the qualified buyer — if you know where to go, Parkhurst says. Many dealers agree.
“Money [for a loan] doesn’t seem to be the issue for anybody right now,” says Chick Gagen, owner of Boat Center of Fort Lauderdale, a Contender, Grady-White and Parker dealer. It’s finding customers to buy a boat. “We need more [consumer] confidence, more desire.”
John Vallely Jr., co-owner of Vallely Sport & Marine of Bismarck and Minot, N.D., isn’t complaining about financing, either. “At this point, we haven’t seen, from a lending perspective, any big changes yet,” says Vallely, a Bayliner, Crownline, MasterCraft, Lund, Skeeter and Starcraft dealer.
“There is money available,” agrees Edwin Lofgren, partner in 3A Marine Service, of Hingham, Mass., a Parker, Four Winns and Seaswirl dealer. “What we need are the qualified buyers.”
Keeter is advising his MRAA members to establish relationships with as many lenders as they can — national banks, local banks, loan brokers, credit unions — to establish credit pipelines.
About three-quarters of the marine lenders dropped out of the boat loan market in 1989-’92, when a combination of recession and the 10 percent luxury tax on yachts gutted the big-boat market. “I don’t think we’ve lost as many lenders in this as we did in that one,” Parkhurst says.
Some of the major banks are still players in the boat loan market. These include SunTrust, Bank of America, U.S. Bank, Bank of the West, the recently merged M&T Bank and Provident Bank, plus many local banks and credit unions, and a number of loan brokerage companies, which have established relationships with both national and local banks and help place loans for boat buyers. Parkhurst says there also are some new players coming in as established firms drop out: BB&T of Winston-Salem, N.C., and CGI North America, a subsidiary of the French bank Societe General of Paris. “They [both] are beefing up and have big plans going forward,” he says.
Boat loans remain, by and large, a good, profitable business for banks, Parkhurst says. He thinks the banks that got out of marine lending probably did so for one of two reasons: either they had huge problems related to the subprime home mortgage mess or they adopted marine lending business plans that didn’t give them high enough profit margins. When the recession hit and people started losing their jobs or their variable rate home mortgages went through the ceiling, they couldn’t afford the payments on their boats, so they gave them up to the repo man. This, in turn, undercut the profitability of some lenders’ boat loan portfolios.
Repos flood the market
Boat repossessions are way up. “We’ve seen an increase of 50 percent in the last six months,” says Jason Lessnau, who manages boat repossessions nationally for National Liquidators, a Fort Lauderdale-based boat recovery and auction house. “We’re handling 300 cases a month.”
Coburn says the return to the tighter loan guidelines that prevailed 20 years ago makes sense. “Improvident” home loans — variable-rate loans, low-down-payment loans, loans made without documentation of income or debt –— bundled as “safe” investments helped trigger the current financial crisis. Those loans were “wrong,” Coburn says. “[The financial meltdown] tells us something: Don’t do it.”
He says total marine sales were $17 billion in 1988, slipped to $11 billion in 1993 (after the 1989-’92 downturn), jumped to $19 billion in 1998, and soared to $39 billion in 2006. He says the demographic of U.S. boaters has changed dramatically over that time. He expects the demographic in years ahead to become closer to what it was 15 to 20 years ago. He projects marine sales will plunge to somewhere “in the 20s” in 2008 and 2009, then, with tougher loan underwriting guidelines, remain well behind the $39 billion posted two years ago. Coburn says sales probably will — and should — stay at this lower level for a while because sales upticks fueled by subprime lending cannot be sustained.
For now, smaller and tougher are better, he says. A smaller market. Tougher loan guidelines.
This article originally appeared in the March 2009 issue.