A coming $265 billion problem?


Boat sales are fueled by money. So when major money problems arise for consumers who might buy a new boat, the impact on dealers is worth understanding.

I’m referring to the little-publicized fact that millions of consumers are about to take a hit to their finances. That’s because a whopping $265 billion in home equity lines of credit are about to begin entering the “repayment period,” according to a study by financial services giant Experian and reported by Credit.com.

The result is that consumers could suddenly see their monthly payments triple or quadruple what they previously paid. It’s expected to be a challenging scenario for lenders and will likely have some negative impact on boat sales in which home equity lines of credit are used by buyers.

From 2005-2008, for example, lenders really promoted home equity lines of credit and originations skyrocketed. If you had a pulse and a house, you could get approved to literally draw out cash for every penny of property equity and then some and more than 10 million homeowners did just that during those three years alone. In the 10 years since, they’ve simply paid the interest, never paying down any of the amount to restore their equity. Therein begins the trouble.

Home equity lines of credit mostly have two periods: the draw period and repayment phase. During the draw period, consumers can draw on the line of credit while making the minimum interest-only payments. However, when the home equity line of credit hits the “reset” mark, normally after 10 years, the draw period ends, the loan balance is frozen and it converts to an amortizing loan. Consumers must start paying back the equity, too. Some home equity lines of credit even contain no repayment period at all, mandating a lump-sum repayment.

The home equity lines of credit now hitting the 10-year reset were set up at a time when everyone thought home values would just keep going up. Ah, it was the days of wine and credit. Then the bust.

As dealers, we encouraged home equity lines of credit as one good source of funds to buy a new boat. Interest on a home equity line of credit was tax-deductible, a benefit that effectively lowered the overall interest rate for our customers. And it’s still a good option for buyers who can draw on a home equity line of credit and are buying a boat that doesn’t, by itself, qualify for a tax deduction (galley, head and sleeping berth).

Lenders loved home equity lines of credit, too, because many unsecured loans they once made could be secured by real estate equity, greatly reducing their risk. Sounds like a win for all?

Unfortunately, a potential avalanche of defaults is very real now, according to credit experts. It’s only a question of how many trigger bankruptcies and foreclosures and it could certainly stymie the housing recovery for some time. Even in cases where refinancing to a lower rate is a viable option — most home equity lines of credit are not now covered by equity since the housing bust — the homeowners will need great credit as lenders are expected to be hard to deal with.

How the home equity line of credit mass resets will impact the economy in general and boat sales for dealers specifically is hard to tell. It is expected to significantly stress many borrowers' finances and the lending industry is going to feel pain, too. A continuing housing recovery is good for boat sales; a drag on it is not. It can set up still another barrier to boating’s growth. That said, however, being forewarned is a first step in developing a plan to succeed in spite of it.


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