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Boat loan rates could drop to low-5s

If Fed stays on anti-recession track, it should spur sales and refinancings, says marine banker

If Fed stays on anti-recession track, it should spur sales and refinancings, says marine banker

The Federal Reserve Board’s rate cuts should bring some interest-rate relief to boat buyers later this year and open up opportunities for refinancing. Boat loan rates could drop to between 5.5 and 6 percent by late spring and maybe below 5.5 percent — “the low to mid-5s” — late in the year, says Don Parkhurst, a senior vice president at SunTrust Bank, a major marine lender.

Parkhurst’s projection assumed the Fed would keep cutting rates to fend off recession, an assumption that has been borne out following Fed chairman Ben Bernanke’s February forecast of “sluggish” economic growth in the first part of 2008 due to the subprime mortgage crisis and housing slump. The Fed lowered its federal funds rate — the rate banks charge each other — 3 points from September through mid-March, to 2.25 percent. On March 16 it cut the discount rate — the rate at which Federal Reserve Banks lend money to banks — a quarter percentage point to 3.25 percent.

And for the the first time since The Great Depression, the Fed in March also opened a lending program to shore up Wall Street investment firms following the bailout of failing investment house Bear Stearns. All of these measures were adopted to strengthen the financial markets and increase liquidity — make more credit available.

“There’s talk of mortgage rates going down to the high 4s by late this year,” Parkhurst says. That could bring boat loan rates down to “the low 5s,” he says. At those rates, anyone who bought a boat after 2003 — when rates reached a 40-year-low of 5.5 percent for a 20-year boat loan of $100,000 or more — might consider refinancing.

Parkhurst says the lower rates might also release some pent-up demand, particularly among boat owners who refinanced in 2003 and haven’t been able to justify a new-boat purchase at the higher rates of late. Loan rates available at the Miami International Boat Show in mid-February hovered around the “high 5s to the low to mid-6s,” he says.

In this stalled economy, defaults on boat loans have shot up, causing some lenders to tighten their lending criteria to buyers with lower credit scores. “Consumers are stressed; they are stretched,” says Grant Skeens, president and CEO of Key Recreation Lending, another big marine lender. “They don’t have equity in their homes because of declining property values.”

This has left them without capacity to take out home equity loans to consolidate high-interest debt or pay off other obligations, like college costs and home repairs. In this climate, Skeens says, lenders are tightening availability of loans to buyers with credit scores below 700. A score of 650 is “subprime,” he says.

Boat-loan defaults rise in hard times. “Our repossession activity was up 45 percent last year over 2006,” says Bob Tony, president and owner of National Liquidators, a Fort Lauderdale, Fla., firm that auctions boats from defaulted loans. He says inventories of defaulted boats are up “substantially,” which means prices are going down, though not much because 60 to 65 percent of the auctioned boats are going to Europe. The weak dollar makes them a very good buy there.

Skeens says defaults have been highest in Michigan, where the auto industry is hard-hit, and in Florida, Nevada, Georgia and California because the housing market in those states is deeply depressed. He says rising numbers of loan defaults can stall or trim reductions in interest rates. In any case, the federal funds rate is for short-term loans, and boat loans are longer-term loans, so they don’t change point for point with the federal funds rate, Parkhurst says.

The credit crunch also has forced lenders to end the practice of issuing so-called “no doc” loans, usually loans issued very quickly without verification of collateral or income, or other documentation of ability to pay off the loan. Parkhurst says there has been an “explosion” of fraud in the lending process over the last two years, much of it made possible because of the growing number of “no doc” loans.

Parkhurst says one marine lender opted out of the boat market before the Miami show, and he expects more to exit because of low sales volume and profit margins in a market that has been in the doldrums for two years. Even with lower interest rates and the $168 billion in tax rebates Congress enacted to stimulate the economy, he doesn’t expect any big economic turnaround until spring 2009.

Unit powerboat sales were down 14 percent, and dollar sales volume was down 9 percent in 2007, says Thom Dammrich, president of the National Marine Manufacturers Association. Dammrich says domestic boat sales closely correlate to consumer confidence — which has trended down for two years — home values, real GDP (vs. GDP pumped up by inflation) growth, and discretionary income. There hasn’t been much good news lately on any of those fronts, but he expects lower lending rates and the tax rebates to boost consumer confidence and maybe get boat sales back on track later this year. Meanwhile, Europeans are getting a good deal on U.S. boats.

“Exports are growing with the weaker dollar,” he says.