A lingering credit hangover

Posted on Written by Reagan Haynes

credit1Boat loans are a bit easier, but housing issues (foreclosures, short sales, lack of equity) still dog industry

With the 2008 fall from the proverbial economic cliff a full five years behind us, boat dealers and manufacturers might be hopeful that by next season more people will return to buying new boats because some short sales and foreclosures will be dropping off credit reports.

It’s true that those missteps stay on credit reports for seven years. But most people didn’t lose their homes the day Lehman Brothers went down. “It took people a while to get into trouble, and most of the foreclosures happened in 2009 or later,” says Dan Parkhurst, senior vice president of marine and RV finance for SunTrust Bank. “Then it kept going for a couple of years.”

Short sales — more prevalent than foreclosures — can take up to a year to settle, which means the repercussions can linger even longer on credit reports, says Rina Aponte, operations manager at Priority One. “We are probably seeing more short sales versus foreclosures, which impacts approvals [and] fundings.”

Home values have also been slow to return, which has continued to choke boat buyers’ ability to use home equity loans to purchase boats. Larry Russo at Boston-area Russo Marine says this is one of the main reasons the cruiser segment remains challenged.

“What has totally evaporated from the market … is the home equity loan,” agrees Joe Lewis of Mount Dora Marine in Florida. “They used to write checks off that loan to buy a boat, thereby being able to write off the interest.” Consumers also have become more conscious of the risks involved in that type of transaction, Lewis says.

All of that means the effects the downturn had on consumer credit ratings and the availability of financing could continue to linger for the marine industry.

Fewer foreclosures

The foreclosure rate has improved significantly, albeit from historically high levels. Foreclosure inventory was down 34 percent year over year in August, dropping to its lowest level in 4-1/2 years, according to Lender Processing Services Inc. Only 6.2 percent of mortgages were delinquent in August, down from 6.41 percent in July.

That’s a vast improvement, but more than 1.8 million mortgages were delinquent between 30 and 90 days this summer, although they were not in foreclosure. More than 1.2 million were 90 or more days delinquent but not in foreclosure. More than 1.3 million loans were in the foreclosure process.

credit2Foreclosures leaped 23 percent in 2009 from 2008, finally hitting their peak in 2011 at nearly 4 million. “Those foreclosures and short sales will be deal killers for marine lenders for a while yet,” says Peggy Bodenreider, sales manager at Sterling Acceptance Corp.

Foreclosures and short sales accounted for 43 percent of residential home sales in 2012, according to RealtyTrac. Properties not in foreclosure that changed hands as short sales in 2012 accounted for an estimated 22 percent of all residential sales.

“None of the lenders will approve anyone with an ‘open’ foreclosure,” says Glen Vogel, an operations manager at Priority One. “However, if the foreclosure has been charged off or settled … one of the subprime lenders may pick it up. The customer does not need to wait for it to drop off, just have some sort of resolution.”

The caveat is that subprime marine lenders tend to max out loans at about $60,000 (see “A lending no-man’s land” in the July issue of Soundings Trade Only).

An increase in time between consumers and their short sales or foreclosures, as long as they have kept otherwise current with payments, will improve credit scores incrementally, Parkhurst says. “The reality is that the older it gets, the less of an impact it has on bureau scores. It’s time-weighted. The first month you were 30 days late on your mortgage really hammers your score. That happened to a lot of people who didn’t go into foreclosure. Their credit got hurt, but they managed to hold it together. For the folks that managed to hold it together and not end up with a foreclosure or short sale or bankruptcy, enough time has gone by for some that they’re in the range of being credit-worthy again for most banks. So, in theory, to the extent those people have gotten back on their feet, they may be getting to the point where they could start thinking about buying a new car.”

It’s a different story for boats, which are considered luxury items, Parkhurst says. Those will take longer to earn bank approval because of the fear that a customer will once again lose financial footing.

“We think everything is going to be better, and it’s not. I’ve been saying all along that it’s going to be a really slow slog out of this recession, and there are still people getting hurt,” Parkhurst says. As a result, “boat sales have just not recovered like lot of people hoped they would.”

Treading water

A lot of people remain underwater on mortgages, Parkhurst says. “Now some of the hardest-hit regions, like the West Coast and Florida, are seeing the market stabilize and increase in value. If those trends continue I would think that would go a long way to people having more confidence.”

Some 10.7 million homeowners nationwide remained “deeply underwater” in September, owing at least 25 percent more on their mortgage than their property is worth, according to RealtyTrac’s monthly U.S. Home Equity and Underwater Report. Another 8.3 million were either slightly underwater or slightly above water, putting them on track to have enough equity to sell sometime in the next 15 months without resorting to a short sale.

“Negative equity in real estate drags down consumer net worth, which is one of the credit criteria considered for a boat loan,” Bodenreider says. “So even though consumers may be feeling a bit wealthier as their portfolios and home values have bounced back, they still have to meet liquidity, net worth, credit history and other requirements to get a boat loan.”

The lack of equity, combined with changes in mortgage lending guidelines, restricts alternative financing options for items such as boats, Aponte says. “With 401(k) money and home equity in your house, you feel wealthy, so you spend more money,” Aponte says. “With no equity and no 401(k), you feel broke and scared to spend.”

Subprime car loans

Experian Automotive reported that subprime auto lending was at nearly pre-recession levels in the first quarter of 2013 and vehicle repossessions jumped nearly 17 percent year over year. That shouldn’t lead to a lending bubble similar to the housing crisis because most Americans will cut elsewhere and continue making car payments because they need their cars to get to work, International Business Times speculates, adding that even during the recession people were more willing to opt for home foreclosures than default on auto loans.

credit3Because boats fall even further down the list of things to keep paying when economic turmoil strikes, it’s unlikely that the increase in subprime auto lending will carry over to the marine industry, experts say.

“I share space in a building with people who interact with car dealers in the D.C. area, and maybe this is unique to Washington because people have been worried about a shutdown, but I’m hearing that car sales were way off in September,” Parkhurst says. “And car sales had done much better than boat sales. [Boats] are a luxury good. I think that’s why we haven’t seen the boat sales as strong as the car sales.”

Starting in late June, consumers began seeing interest rates rise, Parkhurst says. “We’re probably up half a percent, and I’d say the industry is up a half to three-quarters of a point, depending on the bank,” he said in late September. “This is a major change. With that increase in interest rates, the refinancing of boat loans has really slowed. That’s a big deal. That was a big part of our business. It tends to be the bigger boat loans where customers think about refinancing, but that business has really slowed with the rise in interest rates. That affects the customer and the banks.”

Credit still tight

Even though interest rates arguably remain relatively low, many buyers are writing checks because high-net-worth people are using funds from brokerage accounts, Russo says. “The stock market run-up over the past five years has been the source of these funds. At the peak, our finance penetration was 70 percent. Now it’s below 50. We could have greater success if bank requirements weren’t so strict. The class of buyer that drove the finance arm of our business had no trouble getting a loan pre-recession. Now they have no chance.”

Aponte says it’s important for dealers to advertise the availability of financing. “Customers may not realize that there is money available to them to make these purchases,” he says. “The lenders, while not taking some of the risks they did pre-recession, are healthy and willing to lend to qualified customers. Guidelines have eased over the last few years, so it’s important that consumers know that now is a great time to buy.”

But Russo maintains that money is available only to customers who can afford to pay cash. “If they rely on a paycheck, the bank looks at that as a job security issue, maybe. They look at all the reasons a customer can’t comply so they can turn them down. The banks are flush with cash, but they’d rather sit on their money than take the risk. They’ll lend money to people who don’t need it. We see that all the time.”

“Credit right now is still not what I would call loose,” Lewis agrees. “It’s better than it was three years ago, but it’s still on the tight side. And I’m not finding boat loans to be cheap. Even the well-qualified guys, their rates are coming in at 4 or 5 percent. In the world of 3 percent rates on mortgages and zero percent rates on cars, I can’t say the rates on boat loans are any less today than they would’ve been in 2006 or 2007.”

As the economy slowly improves and the banks continue to sit on capital, dealers are becoming increasingly frustrated that they can’t get customers financed, says Scott Anderson of Merrick Bank, which specializes in subprime marine loans.

“I don’t think they’re starting to see it open up to what they see as a healthy point. I think the [banks’] concern is, ‘Do we cross that line again?’ Hopefully we don’t. Hopefully the lending continues to be smart and supports the industry in a positive manner that helps the industry grow and get people into boating, but doesn’t get too far ahead of the game like the lending arm of the mortgage industry. That didn’t do any of us a service at the end of the day.”

This article originally appeared in the November 2013 issue.

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