How easy money led us to hard times

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Industry experts say the marine financing crisis is a microcosm of what's going on in the national economy. In both cases, early warning signs began popping up two or three years ago, but the root causes go back even further.

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National Marine Bankers Association president Jim Coburn describes the predicament as a "perfect storm of challenges." First came the mortgage meltdown in August 2007, followed by the credit crunch that began in spring 2008, and finally the global financial crisis in September 2008.

Throughout much of the 1990s and the first half of this decade, consumers were flush with disposable income. Skyrocketing real estate values allowed them to cash out on equity in their homes to buy boats and other big-ticket items. Banks were eager to oblige, offering easy loans with little or no money down to virtually anyone who walked through the door - even those with questionable credit histories.

All of that came crashing down starting in 2007 with the mortgage crisis and falling home values. Some consumers found themselves with mortgage principals that exceeded the value of their homes. "Americans in general were over-indebted, and they were having trouble making their payments," says Don Parkhurst, senior vice president of SunTrust Bank.

He says things came to a head in early 2008 when interest rates and fuel prices shot up. "Both of those things hurt the demand for boat buying," he says. "We saw consumers completely lock up in the fourth quarter of '08. We couldn't sell anything in the fourth quarter."

The excess inventory in the field was compounded by the fact that banks began tightening their purse strings or abandoning the marine space altogether. "As the economy turned and as banks started getting a lot of losses in their marine portfolios, we saw marine lenders exiting retail and wholesale," says Parkhurst.

On the retail side, Coburn and Parkhurst say, many banks had failing portfolios because they didn't price their products properly or they had poor underwriting practices. This affected their front-end margin (the profit made on a loan) and the back-end margin (collection and repossession efforts), Coburn explains.

"Banks have to change their underwriting guidelines, and that's OK," he says, citing a return to the demand for more documentation and higher down payments. "In the long run we have to view that as not a bad thing, even if it's painful to some of our friends."

It's been even more painful on the wholesale side, says Parkhurst. "I think wholesale financing remains in crisis," he says.

Just as in retail lending, the problems in floorplan financing can be traced back to an overextension of credit, according to Bill Thompson, a former manager with KeyBank. Thompson left KeyBank last November, two months after the lender pulled out of marine wholesale financing. Earlier this year, he founded Cardinal Points Network to help dealers and manufacturers obtain inventory financing.

"There are certain basics of lending to a business that the industry got away from," he says. "The industry got away from sound lending practices to move product." He says dealers depleted their reserves, and when the downturn hit many found themselves with little or no cash on hand. And they can't borrow against their properties because real estate values are down.

Phil Keeter, president of the Marine Retailers Association of America, says there's plenty of blame to go around for the wholesale financing mess. "Manufacturers, in their rush to build more product and capture a larger share of the market, encouraged lenders to loan more money to dealers than they had in the past," Keeter says. "That encouraged more [lenders] to get in the business and offer floorplans at 100 percent advanced rates for dealers." He says advanced rates should be at 80 percent. "Dealers have to have some skin in it.

"No one anticipated that everything was going to collapse as bad as it did," he says. "Now we have all this floorplan financing at 100 percent that really is not worth what it's floorplanned for. The value of the product has depreciated."

This has been compounded by the fact that much of the industry's floorplan financing was concentrated in the hands of just a few national players: Textron and KeyBank, both of which pulled out last year, and GE Capital Solutions.

"Textron and KeyBank said this is a bad deal and we need to get out," says Keeter. "That left GE holding the bag."

Parkhurst says GE tried to work with dealers on curtailments during the early part of the recession, but as sales continued to plummet and more dealers fell further behind on their payments, the wholesale lending giant had no choice but to stiffen its policies and raise interest rates.

This article originally appeared in the September 2009 issue.

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