First signs of a thaw in retail credit

Posted on Written by Reagan Haynes

28_retail_01Departure of risky buyers and nibbling by local banks open cracks in the ice

In the depths of the economic decline, it was common to hear dealers in all industries complain they were losing deals as banks tightened lending guidelines and declined more applicants. Now some boat, RV and auto dealers say they are seeing banks ease up slightly.

Though lenders are still extremely cautious, some dealers have been noticing more consistency with approvals and declines, and more competitive rates during the last few months. Loans on so-called luxury products are not easing as much as auto loans, in part because most automobile brands have their own large sources of financing. But several marine and RV dealers say they are getting more applicants approved by local banks and credit unions, and they claim those relationships have become crucial since so many large lenders have pulled out of both industries in recent years.

RV dealers are seeing some geographic differences in approval trends, but boat dealers seem to think brand is more influential than location in bank decisions. “What I have picked up on is that is there is some softening,” even in Michigan’s hard-hit economy, says Van Snider, president of the Michigan Boating Industries Association. “I don’t hear a great deal of frustration on getting a customer financed.”

Dealers in all industries say loan rejections have lessened because consumers are more aware of what they can afford, know their credit ratings and recognize that they will have to put more money down and probably take shorter-term loans. “These are big-ticket items, and three years ago [people] viewed spending differently than they do today,” says Kevin Roggenbuck, president and CEO of Lake Union Sea Ray, with five locations in Washington state. “So when they’re buying a boat, they measure their ability to afford it differently than they did three years ago.”

A monthly survey of RV dealers shows they are less pessimistic about retail financing than they were a year ago, says Phil Ingrassia, president of the Recreational Vehicle Dealers Association. He attributes that to customers knowing they will need a bigger down payment.

Few in the marine industry, however, are popping the champagne corks. “I’m not hearing about any loosening,” says Phil Keeter, president of the Marine Retailers Association of America. “I think it’s still relatively strict.” He agrees, though, that there has been a more realistic approach on the part of the consumer.

28_retail_02So does Don Parkhurst, vice president of marine lending for SunTrust Bank. The risky customers are no longer applying for boat loans, he says. “I think the people who are interested in buying boats are qualified buyers,” he says.

Fred Pace, co-owner of Destin, Fla.-based Legendary Marine, says the changing credit situation has helped improve sales at all four Legendary Gulf Coast locations. “I think the lenders certainly still have higher credit requirements than they did a number of years ago,” he says. “But we’re seeing a greater approval ratio than a year ago” – particularly in the last two or three months. “That’s partially due to the creditworthiness of the customer, but I think it’s a little more that the credit requirements have relaxed somewhat.”

Consumers have worked for the last year or so to improve their credit ratings, Pace says, recognizing that banks are placing increasing importance on those scores. He points to several examples of people who bought boats at Legendary in the last month who had been turned down six or nine months ago.

“I don’t want to insinuate it’s some dramatic change – it’s been small and subtle – but it’s been enough to help fuel some level of recovery for us,” says Pace.

Not easing for all

Randy Wattenbarger, owner of Cleveland (Tenn.) Boat Center, has had a slightly different experience. “As a general statement, the retail finance problem is the choke point for us,” says Wattenbarger.

“Some people we deal with are financially able to buy a boat on any given day – either with cash or they can hit savings portfolios – and have good credit scores, and if they choose to get financed, they get good rates,” says Wattenbarger, who sells MasterCraft, Cobalt, Triton and Cypress Bay boats. “The ones who have problems are the ones who need financing.”

Even if they can afford payments and have steady jobs, those customers are required to put more money down and take shorter terms, which effectively makes it impossible for them to take the loan, Wattenbarger says.

Ben Wilde, who sells Ranger Tugs and Nordic Tugs at Wilde Yacht Sales in Essex, Conn., remembers when banks considered large boat loans safer than home mortgages. He has not seen much loosening of retail financing but says, fortunately, 75 percent of his customers pay cash.

Six months ago, between 50 and 70 percent of people prepared to buy a large boat were turned down, says Lake Union’s Roggenbuck. Today, about a third are refused.

29_retail_03Banks were turning down credit applications for boats ranging from 17 to 30 feet about 25 percent of the time six months ago, whereas today that number has shrunk to about 15 percent, Roggenbuck estimates. Banks were more likely to finance customers at the boat show than in the past, Roggenbuck says, because historically many show buyers hadn’t been planning to buy a boat. However, this year that attendee wasn’t applying.

Buyers at Hoffmaster’s Marina in Woodbridge, Va., typically have high credit ratings and have no trouble getting approved, says general manager Joe Hoffmaster. But now banks are skittish about 20-year terms and won’t always finance the whole loan. “What happens in a lot of cases is you make a concession either in financing or in terms of freebies or other incentives to help make up the gap,” Hoffmaster says, which hurts margins.

Retail financing suffered another blow in May, when Bank of America quit offering indirect retail lending. The bank says it will continue to offer direct financing to consumers seeking boat loans online, but some dealers say the continued shrinking of the consumer lending landscape is devastating. Some estimate that Bank of America accounted for about 20 percent of retail marine loans.

‘Sign and drives’ gone

Marine and RV dealers say consumers are increasingly aware they will probably not walk into a dealership and leave with a boat or RV that day. The auto industry, however, is still seeing some “sign and drive” deals and no-money-down loans, according to Henry Ware Jr., president of Mississippi-based Southaven Pontiac-Buick-GMC and an at-large member of the National Automobile Dealers Association board of directors.

“I think the customer is helping himself right now because a lot more people are coming to the table with cash,” says Ware. “It is kind of helping the financing go a bit smoother, whereas a year or two ago, basically, there was no money down; it was just sign and drive.”

GMAC will offer special deals depending on inventory or manufacturing needs, says Ware. Even Mercedes-Benz and BMW, brands that had never offered zero down in the past, are beginning to make those deals.

32_retail_04The RV side is benefiting from a partnership between GMAC and Thor, the largest RV manufacturer, says Ingrassia. But RV buyers still aren’t getting zero-down loans.

“Banks just aren’t making no-money-down loans anymore,” says Parkhurst. “They are definitely requiring real down payments – generally between 10 and 20 percent.”

People understand they will need to put 20 percent down, Wilde says, and aren’t surprised that deals take four or five days to put through. That has cooled off the impulse customer, says Wilde, who recalls the days when people came in with no intention of buying a boat and left owning one.

“That happened three times once on an Easter weekend … but we don’t see that happening today,” he says.

“Three years ago, people wanted a boat today – we called them ‘get-me-dones,’ ” Roggenbuck recalls. “They would say, ‘If you can get me done with zero down, I’ll take that boat home with me.’ It was a consumer-driven market then.”

A changing mindset

Banks are loaning money more liberally now than three months ago because credit analysts are less worried that the entire economy is collapsing, Legendary’s Pace speculates. Just six months ago, it seemed banks turned down creditworthy buyers out of fear.

“I think we’re just now seeing the positive numbers, at least in residential real estate, so I think that’s going to have some effect on the mindset of the bankers,” says Roggenbuck. “These guys have to do business, too; they have to stay alive and make loans.”

Banks are accepting less than an 800 credit rating now, and instead of asking for 25 percent down, they’re looking for 15 or 20 percent, Roggenbuck says. And though they still want buyers to have some liquidity, it doesn’t have to be the amount it would take to pay off the boat.

“Because there were so many losses at banks in the real estate area, banks are looking for non-real-estate loans, and that would include marine loans, auto loans and RV loans,” says Parkhurst. “Our management [and management at other banks] is actually pushing to do more of that right now to diversify the portfolio from real estate because that’s where banks really got burned.”

After a slow January, spring was showing surprisingly strong demand for loans, Parkhurst says. “I don’t know if a bank that already wasn’t in marine lending is going to come in, because that’s a big step, but for a bank [that] was already doing it and has expertise, they want to dial up the volume and are getting more aggressive on pricing,” he says, which will increase competition.

Another reason banks are making more loans is because unemployment has shown signs of leveling off, Parkhurst says. “When unemployment was rising on the early side of the recession, it was hard to know who the next guy going to be laid off would be when you were underwriting a loan,” he says. “The perspective [now] is those who were going to lose jobs already lost jobs.”

Until recently, rates had been abnormally high, says Wilde. In July 2008, they were around 5.99 percent, and despite the Fed lowering rates, boat rates have hovered around 6 or 6.5 percent, he says. Finally, starting at the end of April, Wilde saw fixed loan rates drop to 5.29 percent.

“That’s the lowest we’ve seen in seven years,” he says. “That’s great. We think that’s going to help.”

Going local

Pace says a resurgence of younger families looking to buy their first boats has been stronger than he has seen in years and many are getting their financing through local banks and credit unions. Military personnel, with their solid job security, have been increasingly buying boats, and local military credit unions seem to have a strong appetite for marine products, he says.

MBIA’s Snider says that in the metro Detroit area, in particular, credit unions have been aggressive about offering marine loans. Many of them have remained healthy during the downturn and have stepped in to fill the void left by larger banks leaving the industry.

Parks Marina and Okoboji Boat Works in Okoboji, Iowa, and Sioux Falls, S.D., hasn’t been affected in terms of financing, says owner Butch Parks, who encourages dealers to cultivate stronger ties locally.

“We had good relationships before this whole thing hit with local banks for retail and wholesale financing, so we haven’t had any problems,” says Parks. “We kind of saw it coming [as early as 2004 and '05] and knew big banks would be pulling out and made the changes ahead of time.”

Brand plays a role

Banks measure portfolios based on performance, and in the new order they are probably taking brand into consideration, says Roggenbuck.

Brands were a bigger consideration when banks were more worried about manufacturers staying in business, Parkhurst says. They do not take location or economies of specific regions into account when making loans, he says.

“It’s hard for us to take that into consideration in our underwriting,” he says. “The only real way it’s taken into consideration is if someone’s unemployed or newly employed.” Consequently, loans might be more difficult to get in areas with high unemployment rates.

One problem that is occurring across the board is people looking to trade in one boat to finance another. “There are a lot of people who have a boat already and are trading up, who have an unrealistic expectation of what the boat is worth,” says Parkhurst. “They don’t understand that boat values have dropped. I think that’s why the down payment is a problem for some dealers, because people are having to come up with real cash when they don’t have any equity in the boat.”

Where it’s headed

“I think the memory of the losses sustained by banks will be long-lived,” says Roggenbuck. “If it ever gets there again, it will be many years.”

Parks believes things will bounce back, particularly if dealers cultivate those local relationships. “People would rather do business with other people they know rather than a conglomerate,” he says.

“I think the next 20 years are going to be very good, starting in about 2012,” Parks says. “I would say we’re going to have a 20-year run that will equal [the marine industry's success] from 1984 on. I think the future’s so bright dealers are going to need sunglasses starting in 2012.”

This article originally appeared in the July 2010 issue.

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