F&I Guy: Easing Collateral Damage

In addition to their fears of maintaining capital requirements and the unfolding worries of financial regulatory reform, lenders have growing concerns about establishing collateral values of boats and motors. They have been saddled with under- or non-performing loans across their product offerings from secured debt such as real estate to toxic credit card receivables. While they have received some help and encouragement from the Federal government to keep families in their “underwater” homes, the lifelines hardly extend beyond that.

An inclination may be to vent, “Well, the banks made the lousy loans to unqualified borrowers, so it’s their problem.” However, the approvals going forward are also their choice. So, the boating industry needs to work to restore the quality reputation boat loans – and underlying collateral – had and to help streamline the process of getting accurate selling prices in the lenders’ hands.

Similar to real estate, boat prices have been pressured downward since 2005 due to excess and distressed inventory, according to a recent article in this magazine by Peter Houseworth of Info-Link. When loans on land or water are tied to an underlying asset that is losing value, more become delinquent, or in worst cases need to be foreclosed or charged off with losses absorbed by the bank.

With a fear of making bad credit decisions, lenders still serving the boating community are finding ways to lessen risk when making loans, but the methods significantly raise the cost of acquiring a boat. They start with low price guide values, may cut them another 15 percent for “negotiation,” then ask for 20 percent down payments. Doing the math results in loan-to-value ratings of 65 percent or less of the selling/asking price. They may also want some additional collateral to fall back on like a second lien on a house. And this would be a deal for people with 700+ credit scores.

Boats that need to be taken back, new or pre-owned, can return to dealers or brokers or marine remarketers who say they have a good record of recovering higher prices on the resales. Matt Amata of National Liquidators reports, “We’ve been successful over the past ten years selling boats through our auctions that typically bring an average of 91 percent to 104 percent of unadjusted low price guide value.”

The low percentage corresponds to the period when repossessions recently peaked. Amata now says the values have returned to, and in some cases exceed, 100 percent of low value. Unadjusted guide values do not take into consideration deductions for use in salt water and other factors that would reduce the boat’s suggested selling price.

Take-backs that end up without the benefit of having a marine professional guiding the sale do less well. Greg Davis of Davis & Co. Surveyors & Engineers had brisk business in 2008 and 2009, working for insurance firms that had coverage on foreclosed boats. “Boats at the auction lot had equipment missing and vandalism damage,” he says. “we expect some of it inflicted by the owners. That flood of repo’s affected the used – and new – markets and dropped prices on all.” Davis feels the market has since stabilized because boat repossessions have dropped significantly.

Extending “handholds” and providing current market trends to lenders should help raise their comfort level regarding new and used boat pricing. The reality is, it has never been easy to determine bulletproof values, and that’s why most who seek them accept price ranges. From a surveyor’s perspective, Davis held a workshop with one lender recently to assist in evaluating its book of loans and provided technical and market knowledge to help evaluate new requests.

Amata contends values are stabilizing and price guides can be relied on as a starting point. He points out to lenders that exceptions always exist based on the pedigree and reputation of the builder, the type of boat and the availability of similar product, and these factors are present in any sale, new, used or recovered.

Boat sales websites provide a checkpoint for asking prices for thousands of high-volume production boats as well as low-volume custom builds. Verification calls to dealers and brokers can provide a local view and help sharpen focus. If lenders call looking for help, be prepared to become their sounding board.

As the industry heads out of its inventory overload phase, restoring confidence in boat prices and underlying collateral values will help smooth the way for growing loan approvals.