Attorney Leonard Bellavia's opinion piece in April's Trade Only Forum has sparked considerable reaction among marine lenders. His observation that marine dealer defaults may be looming is real and timely. After the near failure of Bear Stearns, Federal Reserve Board Chairman Ben Bernanke has now belatedly conceded that a recession is clearly possible.
Mr. Bellavia's claim that marine floorplan lenders were somehow partly responsible for the economic downturn that is victimizing boat dealers is off base. This economic downturn is the result of the unwinding of an overextended housing market boom. The housing slump is the worst since The Great Depression. High gas prices, combined with high interest rates, have led to a lack of liquidity among consumers, which has also hit the recreational boat market hard, given the luxury nature of the product. Declining home and stock prices are also hurting consumer confidence, which causes them to defer from buying luxury goods, including boats.
The subprime mortgage loans that Mr. Bellavia mentions have indeed contributed to the housing slump. However, the few lenders, such as Countrywide and Wamu, that were big players in subprime lending, are not marine floorplan lenders as he says. Nonetheless, I am in complete agreement with him on the damage low-equity and no-equity boat sales have had on the marine industry. Today, many boat buyers are in a situation where they have negative equity in their boats and simply cannot qualify to purchase another boat. However, some dealers have had a hand in this with inflated trade allowances and purchase prices on sales contracts passed on to unwary banks.
Mr. Bellavia credits dealers with saving lenders ?millions of dollars on marketing? and suggests that they make the banks huge profits on retail marine loans that they refer to banks. He ignores the fact that banks pay dealers substantial referral fees or participations for these loans. These are fees that banks do not incur when the borrower comes directly to the bank for a boat loan.
Mr. Bellavia further asserts that when a dealer stops making interest payments on their floorplan line that a bank has complete discretion in allowing extended periods in which dealers can regain financial footing. In fact, banking regulations require that the loan be charged off as a loss after it is 120 days late. The bank must then move to repossess and liquidate the boat inventory that is securing the floorplan financing.
When a dealership is "out of trust" with its floorplan lender, it has sold a boat and received payment without disclosing this to the lender or paying down the floorplan balance. This is not simply a technical violation of the floorplan agreement or a slight oversight, but a serious act of fraud, which should not be rewarded with forebearance by the floorplan lender.
In the last serious recession our industry encountered, which was nearly 20 years ago from 1989 to 1992, we saw lenders move aggressively to repossess boat dealer inventories. Nearly 25 percent of the dealers went out of business during that downturn. Whole inventories of boats were dumped on the market by floorplan lenders at steep discounts. This made it difficult, if not impossible, for surviving dealers to sell new boats and seriously damaged used-boat values, which dropped 40 percent in some cases.
In the present downturn, most floorplan lenders have been very patient, offering breaks on scheduled curtailments to allow dealers more time to sell boats, provided the dealers have kept interest payments current. In addition, they have offered discounted interest rates on retail financing and generous terms to help dealers sell boats. Some have even offered financial counseling to help dealerships through these tough times. In short, dealers and their prospective attorneys cannot, in good faith, blame this downturn or its consequences on the marine floorplan banks.
With many dealers struggling, it is important to consider where the economy may be headed. Many astute economists disagree on the course the economy may take over the next couple of years and, as a student of economics, I remember that those who use a crystal ball to predict the future are destined to eat glass. That said, Bon Appetit!
Shortly after August 2007, when the credit markets began to seize up, the Federal Reserve began lowering short-term interest rates. At times since then, the Feds? interest rate moves downward have been dramatic and have been combined with various actions to increase liquidity in the credit markets. When the Fed has acted on interest rates, there has been a lag between policy actions and the impact on the economy, which is usually between 12 to 18 months.
This means that any improvement in the economy from the first interest rate cuts last fall will not appear until this fall or spring 2009 at the earliest. A likely scenario based on this policy lag would probably be a continued weakening economy until late 2008, with a bottoming in early 2009. By late 2009 or early 2010, we should start to see some improvement as the more dramatic policy moves kick in.
When it comes to recessions, the marine industry is usually one of the first parts of the economy to feel the pain as buyers defer boat purchases when they feel uneasy about the economy and their employment security. We are also one of the last parts of the economy to pull out in a recovery, because it takes time before consumers regain their confidence and financial strength to the extent necessary to buy a boat. Given this further lag in marine industry recovery, it is not unreasonable to guess that boat sales may not get substantially better until sometime in 2010.
There are other factors that could also impact the economy beyond Federal Reserve monetary policy. We are in an election year, and two out of the three candidates for President are on record as wanting to raise taxes. Raising taxes would reduce consumer disposable income and remove liquidity, which would further weaken the economy. On the plus side, it is possible that oil prices could come down as the downturn spreads to Europe, China and India, which would reduce demand for oil in those countries. These lower gas prices could help to speed recovery in our economy and might have particular benefits for the marine industry.
Considering my aforementioned economic forecast, it's time for dealers and others in the marine industry to batten down the hatches and prepare for more rough water ahead.
Don Parkhurst is the senior vice president and manager of SunTrust Bank's Marine & RV Finance Division. He has nearly 30 years experience in the marine finance business and is past president and a director of the National Marine Bankers Association. He serves on the advisory board for Soundings Trade Only. SunTrust Bank is a leading retail marine lender, but it is not a major floorplan lender or major subprime mortgage lender.
This article originally appeared in the May 2008 issue.