Loans are available in the $50,000 range, but a credit blemish can torpedo the sale of a larger boat
The marine retail lending market has certainly leveled out since the financial meltdown of 2008, when it seemed to change on a daily basis. That’s welcome news to dealers, lenders and manufacturers, who are, by and large, more accepting of the new model of lending criteria. The downturn, however, has had lingering effects.
The number of consumers who have bankruptcies, foreclosures, short sales and loan defaults — blemishes that will stick with them for years on credit reports — is at a historical high, although exact numbers are hard to pin down. The dynamic has created what some lenders call a “no-man’s land” for customers who want to buy boats in the six-digit price range but are outside the scope of non-prime lenders’ criteria. That state of affairs is having a greater effect today, some lenders say, as consumers begin to feel more confident about their finances and attempt to finance or trade in boats worth a fraction of what they were five years ago.
They’re confused by the fact that lenders are beginning to ease up slightly on essential purchases, such as cars and homes, while luxury loans remain tight, leaving them at a loss to understand why banks don’t want to lend them money.
Boat dealers have grasped the new normal, but some are growing impatient with lending standards they believe are overly cautious, says Scott Anderson, marketing vice president for Merrick Bank, which specializes in non-prime loans. “I think most of them were understanding” about post-recession lending standards, Anderson says. “But some continued to be frustrated they couldn’t get customers financed, especially as the economy appeared to improve and banks were still sitting on capital.”
Dealers may be growing impatient with lingering tight lending standards, but consumers seem even less likely to understand rejections than they were immediately after the recession. “A foreclosure, short sale or bankruptcy is just the kiss of death right now, except maybe for that subprime lender,” says Don Parkhurst, senior vice president of marine and RV finance at SunTrust Bank. “So if you’ve got a blemish like that and you’re trying to borrow money on a bigger boat, it’s very difficult to find financing.”
Delinquencies may be more common now than in the past, but that does not dilute the effect they have on credit ratings. The number of people with a foreclosure, repossession, short sale or other loan delinquency is difficult to determine, but it could be a “fairly large part of the market,” Parkhurst says. That leads to a disconnect between the lender’s perception of the seriousness of the default or bankruptcy and the consumer’s perception.
“It happened to so many people that, from the perspective of borrowers, they don’t think it’s as big a deal,” says Parkhurst. “The lender, I think, is like a turtle going into their shell. They’re pretty spooked coming out of the recession because they never thought the losses would be that high, so they’re much more attuned to future risk.”
The short sale phenomenon has also created a challenge because lenders tend to see them as being the same as foreclosures. Borrowers often believe they were as diligent as possible in paying back as much as they could for a house they were often upside down on. Short sales usually are classified the same as foreclosures on credit reports, too, which frustrates borrowers even more.
“For us, short sales are as risky as a foreclosure, and I think the person who’s not in finance doesn’t understand that,” Parkhurst says. “But in a short sale the bank has to take a loss on a partial amount of the sale. They might settle, but it almost is as bad because the bank lost money on the loan. As a society, we haven’t ever had this big of a short sale phenomenon out there.”
Prime and not so prime
The subprime market is a mystery even to people such as Parkhurst who have been in the business for 20 years. “We try to cater our niche to the masses, and most of the loans we do are considered non-prime,” says John Haymond of Medallion Bank. “A lot of times you’ll get people who had to file a bankruptcy. Underwriting guidelines are very canned for the most part, but it’s how banks stay consistent for the dealers and for the regulatory environment. It’s a very prudent business.”
Because of the risk involved, the loan rates at Medallion Bank vary between 7.95 and 17.95 percent. “It’s pretty hard to take your kids to school in a boat, so it’s definitely a luxury item,” Haymond says.
The term subprime has a negative connotation because of the housing crisis, but it actually refers to FICO credit scores under 680; near-prime loans typically fall between 680 and 720, Haymond says. “We do near-prime loans if they don’t qualify through traditional lenders,” he says. “They might have high scores but have a bankruptcy on their credit report. Some lenders won’t finance anyone who’s had a bankruptcy or foreclosure. We’ll buy those all day, but only up to $50,000. Some want to get into a six-figure motor home or boat, but we can’t accommodate those. It’s just such a small segment of the market.”
The near-prime buyer, who used to be called the marginal buyer, is typically in the 680 to 700 range, Parkhurst says. “That’s probably a pretty good customer in terms of liquidity and net worth,” he says, “but there’s one nick that knocks it outside the box, one hiccup, but basically the loan is OK. It just falls outside of that prime box.”
Then there’s super-prime, a new category that refers to those with 800-plus FICO scores — “perfect credit, no blemish ever, tons of liquidity,” Parkhurst says. “With that kind of customer the problem you face is your competitor is paying cash for it.”
And then there are the applicants with decent credit scores but perhaps a debt-to-income ratio that’s moving in the wrong direction. In the rare instances when they find financing, those borrowers often don’t want to pay the high rates.
“We get complaints that the interest rates are too high,” Haymond says. “People don’t realize that our biggest loss comes from that no-man’s land. Those are the applicants [whose] debt-to-income ratio is getting worse, and we end up taking losses. We will buy that, but we do it at 9.95 or 14.95 percent.
“Say you had a 719 score and were used to paying 4 or 5 percent through your credit union or whatever banking entity you’re using, and you got approved at a 14.9 percent rate,” he says. “You freak out. We see a lot of charge-offs in that so-called no man’s land because people are often headed down in their profiles rather than up. They still have a credit score that allows them to qualify for credit. Those people who are headed the wrong way, and one hiccup happens in their income, the first thing that gets repossessed is not the Suburban — it’s the boat. So we’re very careful in that environment.”
Non-prime boat loans are a unique niche, Merrick’s Anderson says. “If things happen to get tough on the buyer, a boat becomes less of a priority than the necessities,” he says. “At the same time, if some people have had problems that put them behind but are good loan candidates, we will finance them. There are a lot of people like that in that smaller segment of the market.”
“There are a lot of ancillary benefits to boating and fishing from a lifestyle standpoint,” Anderson adds. “You create a lot of value for an individual or family to enjoy. We saw a need there and wanted to give people an opportunity to get back into boating and help rebuild their credit. We developed a product from the start to fill a need in the market.”
Because Merrick was conservative in loans from the outset — always requiring background checks and money down and refusing to lower rates to compete with other lenders, some of which no longer deal in marine loans — the lender weathered the downturn better than some, Anderson says. In fact, 2008 and 2009 were two of the bank’s best years. “I attribute that to what we did between 2004 and 2007,” he says. “During that time, we maintained consistent underwriting practices, our portfolio was well-documented, we always required down payments and proof of income, and we always had parameters about what we’d finance in relation to the value of the boat. That boded well for us because when some lenders left the industry it actually created more opportunity for us to grow.”
The loans that less-than-prime lenders do write are for relatively low dollar amounts, usually on a vessel $60,000 and below. Anything above is the true “no-man’s land” because the funding for that customer just isn’t available. “Nobody wants the risk. No subprime lender is going to go out on a limb for large-ticket amounts,” Haymond says. “I’ve been a banker for 25 or 30 years, and there’s no way. It’s easy for people to walk away from boats because they don’t need them.”
Risk or opportunity?
Peggy Bodenreider, sales manager at Sterling Acceptance Corp., believes there is an opportunity for a lender or service company to enter into higher-dollar boat loans. “We’re starting to see applications from people who’ve weathered the storm pretty well but may have had a short sale or even a foreclosure, so traditional lenders won’t touch it,” she says. “Some of them are pretty financially sound, other than those glitches. The thing that concerns me most is we are starting to see these clients who were longtime boat owners unable to get back into boating. Maybe they give back a property or have a short sale, but everything else is good, and they basically still have good credit. One little hiccup, and we can’t get them financed. It’s definitely an issue.”
Some of the potential buyers with blemishes on their reports have FICO scores in the high 600s or low 700s, Bodenreider says. “How is this going to affect scores going forward when so many people have gone through this?”
Bodenreider thinks lenders could charge higher percentage rates to cover the risk associated with larger subprime boat loans. Others say buyers aren’t amenable to paying those high rates and that the risk is too high and the volume too small for a lender to get involved in those loans.
“There are some people who have had short sales or foreclosures, and once they right-sized their lifestyles are doing reasonably well now,” Parkhurst says. “But I think from a risk perspective, that’s uncharted waters. I don’t know if there’s anyone willing to make that gamble; it’s a pretty big gamble. And I don’t think that customer’s willing to pay the rate necessary to cover the risk, so that’s why I don’t think you could make a business out of it. And you know if he does accept the rate, he’s going to refinance out from under that loan the first chance he gets, so you’re only going to have him during the risky part of the cycle.”
Jared Zimlin, business development director for Priority One Financial Services, says the size equation is simple: The larger the loan, the greater the risk. “The lender is ultimately looking at those larger loans and saying, ‘What if we get this thing back? If it’s $200,000, what’s it going to get at auction?’ Add that to ‘What if we have 100 of those on the books?’ ” says Zimlin. “That’s quite a bit of exposure. If it’s a $60,000 boat and they put 10 percent down, that’s pretty safe.”
Dealers know the days of easy loan approvals are done, but what they may not have learned is that the more applications they submit that get turned down, the less favorably the lender looks at the applications those dealers submit. “They do track funding ratios, and what dealers send versus what they actually fund,” Zimlin says. “So if a dealer has a strong funding ratio, they might step out of the box. But if that lender feels like a dealer sends in a lot of deals that don’t get funded, the lender might not help. So it’s important to have a good relationship with the lenders to try to filter out what they can’t fund. Each lender has their own internal scorecard.”
Priority One, a company that dealers hire to match buyers with lenders, segmented out the people who work on subprime loans from the prime loans. “It takes more time to work on those non-prime deals,” Zimlin says. “You’ve got to talk to your clients differently — there’s different information you need to gather, so there are different motivations.”
Because subprime loans take longer to work, the base pay of those working them is higher. Sometimes dealers don’t have the time to dedicate to those types of loans, so they get lost in the shuffle.
Zimlin says that when dealers are taking the time to focus on subprime loans they should prepare buyers for a higher interest rate and be sure they still want to make the purchase so all that time isn’t wasted. “You’ve got to get them to understand why they are where they are and ultimately figure out what their payment’s going to be,” he says.
Another hurdle for dealers is the devaluation of customers’ current boats. Those built prior to 2009 took such a resale price hit that several of the people who own them are still upside down on their loans, Parkhurst says. “That’s still a problem. A dealer’s got to work the fact that these guys are upside down on their loans and they’re going to have to bring cash to the table to make a trade-up deal work,” he says. “We see a lot of people who are in denial about the current value of the boat they own.”
The stock market, the housing market and the boat market got hit about 35 percent after the financial collapse. The difference is that the stock market came back. “Boat values are never coming back,” says Parkhurst. “If you’ve got a boat built in 2010 or 2011, those are fine. It’s the pre-2009 vintages that are the problem, and that’s why you haven’t seen the sales.”
One silver lining to the downturn has been low interest rates. “Rates are down a quarter since the beginning of the year,” Parkhurst says, “but I do think banks are seeing the cost of funds go up over the last month, so there is some pressure building for us to raise rates. I think we’re sitting at the bottom now, so I think the next move will probably go up. But maybe we’re going to stay where we are.”
This article originally appeared in the August 2013 issue.