On an upward trajectory since roughly 2012, marine lending is as strong as it’s been in a decade.
It’s one of those topics that’s not as tangible as engines and new electronics or as day-to-day applicable as safety and survival, but it is a topic important to a large number of boaters (and Sea readers). To give our readers as much insight as possible into a matter of significance, we tracked down an industry veteran and asked him a bunch of questions, which he was kind enough to answer.
Interview by Mike Werling
Bill Otto is the cofounder of the National Marine Lenders Association, an organization that got started in 1979 and has represented marine lenders’ — and borrowers’ — interests since. He’s now the director emeritus and treasurer of NMLA (nmla.org). Prior to that he was the head of the boat lending division of one of the bigger banks in Michigan. Now, he owns Lake Effect Financial Services, a Grandville, Mich.-based company he founded in 2008, and is the Great Lakes agent for Just Boat Loans (justboatloans.com) in Annapolis, Md. All told, he’s been in the marine lending space since 1969. He might know a thing or two.
Read on to find out more.
Sea: What is the lending climate like right now? Better than five or six years ago? The same?
Bill Otto: There’s no question it’s better. Five years ago (2012), it was just at the point that we were starting to come out of the abyss that started, in reality, in 2007 but really got noticed in 2008. It’s been steadily getting better since, especially on the retail side. There are more lenders, and interest rates have been pretty level. We’ve had, as an industry, the best kind of growth, which is slow and steady. The industry got rid of the low-hanging fruit in distressed inventory (repos) from those 2008–’11 days, and as a result used-boat values are less depressed. It’s really all pretty good. Again, it’s happened the way you want to see it grow, slow and steady. Of course, it’s never right for everybody, and there are those who wish it was better instantly, but we’ve learned through the years that instant gratification doesn’t last long. I think it’s all positive. Could it be better? You bet, but it could be a lot worse.
What factors are contributing to the improved state of lending?
There are more lenders in the market, our applicants are stronger now than they were during the downturn and it’s a better market. The economy is moving forward and people feel better about themselves, and when people feel better about themselves, then things that are classified in some cases as toys [come back into the picture]. When you’re just trying to keep the wolf away from the door, you don’t think about those toys so much.
What are you seeing with interest rates?
Interest rates are stable, there’s no question about that. Having said that, the fed is supposed to raise it a quarter of a point this afternoon, but in light of the fact that we haven’t had an increase this year, I don’t see it as a big deal at all. There’s no question that other increases are coming, but it’s not bad. Interest rates in boat lending haven’t dictated in the last 10 years whether anyone bought a boat or not, and I don’t think the increases we’re going to see in 2017 are going to bother anything. They might even get some people off the fence. If you’re considering purchasing a boat, you’re probably getting the urge now with winter ending, and if you’re thinking rates in July or August are going to be a quarter or half a point higher than today, maybe you’ll make the move today if you’re going to finance it. Why pay any more in 90 days?
Is there a range you’ve seen in the last 12 months? What’s the best rate? The average rate?
There’s a lot that goes into that. If you’re talking about fixed rates for up to 20 years, it’s been in the fours — once in a while 3.99 or 3.75. If you are super qualified — have one-third or more down, your credit score is 830, can handle a shorter term and you’re liquid — sometimes you can do better than the general population, but not a lot. There are other deals where with pricing on LIBOR with rate locks in increments of 30 days you can get down lower. However, fixed rates are so close to variable rates, why take the chance? Even if it’s going to save you 1½ percent, do you want to take the risk when you could be paying 2 percent higher in a year? When variable rates move, they can move fast. History has taught us that knowing what you’ve got is a comfortable place to be.
What’s the typical down-payment requirement today?
On a loan under $100,000, you’re probably looking at between 10 and 15 percent down. That assumes the boat is worth the purchase price. Over $100K is in the 15 to 20 percent range. Required down payments are also driven to a large extent by perceived boat valuation. New boats and used boats are usually evaluated differently. Another consideration is a vessel the customer now owns that is being “traded in” and brings with it its own set of plusses and minuses from an equity point of view. When it’s all said and done, the lender will advance a percentage of what they deem the boat to be worth, not always what is reported to be the purchase price. When you get into a purchase price of $1.5 million to $2 million or more for a boat, lenders can require substantial equity and the amount down can be as much as 30 percent. It’s all dictated by the customer and how well heeled they are. The lender would like to put out as much as they can, but they like the feeling that they’re going to get it back.
What are the loan requirements of a borrower in the $1 million to $3 million range?
At this level, the requirements are higher than for the customer who wants to borrow $100K. It’s the same principles — Credit 101 — but ramped up to some degree. You need to have a solid credit history, employment history, personal financial statement with real equity, down payment, unquestionable ability to service the debt and a strong liquidity position after making the down payment. If you use your entire nest egg for the down payment, you’ve got nothing to fall back on. You would think that anyone looking at this size of loan would already be in tune with the concept, but occasionally I still get surprised.
What are any downsides right now, either for lenders or borrowers?
From the lender’s perspective the biggest downside for quite some time is that our biggest competitor has often become cash. Potential borrowers just can’t see the wisdom of leaving money in bank deposits that pay them, in many cases, less than 0.5 percent. I really can’t blame them in that regard. From the borrower’s perspective, as long as they can meet the lender’s criteria, it’s all good with no real downside at all.
What are a couple of things people underestimate about the financing process?
One thing we run into are down-payment requirements. It’s amazing the number of deals we get where the buyer says, “You mean I can’t do it with nothing down?” That philosophy is still out there in some cases, but more and more people understand that equity is a necessary part of a loan. Verifiable liquidity is another part of the equation that wasn’t a part of lending so much prior to 2008. Liquidity is the part where you look at the potential customer’s financial statement and are looking for liquid assets: cash, CDs, stocks, bonds that are accessible. Real estate is certainly an asset but not considered liquid because of the time it can take to sell it. Some people forget that. The necessity to have a personal financial statement that is current is something people forget about. In addition, borrowers need to have real income verification in the form tax returns.
What are a couple of avoidable speed bumps in the process?
Assemble your income information and your tax returns. Alert your accountant or CPA to the lender who will be inquiring. Have copies of current statements of your liquid assets. Have a current personal financial statement. All these, along with a fully executed Purchase Agreement, will make the process go much smoother.
What is pre-approval, and how can buyers go about getting it?
To some extent it’s a little bit of a misnomer. There are pre-approvals to a point, but what is always problematic is the lack of an identifiable boat that is being purchased. As we have already discussed, a valuation of the boat being purchased is a major part of the decision process. It’s kind of something you need. If you’ve been shopping, you probably know what that 42 flushdeck is going to cost, and you probably in your mind have said, “I will afford this much.” Most people do the math and figure out what the payment range is going to be. So on our side we can give you some information that will give you a license to shop at least. We can clear credit and verify income, assets and employment. We can do all of that up front and say, “Look, if you’re going to borrow $200,000 for 15 or 20 years at this rate, we should have an opportunity to do business depending upon the collateral valuation of what you purchase.” Yes, the moon and the stars are going to have to line up, but that’s as far as you can license the person. Then they have to go out and find the asset. You’re not automatically cleared for anything, and I think maybe there’s a little bit of a disconnect, but you try to do the best you can with what you have to work with.
Are there expenses apart from the cost of the boat that can be included in the loan?
That varies from lender to lender. The answer is yes, but it’s a qualified yes. Some of the things that can be put into the loan are sales tax, extended warranties, and other back-end products such as collateral protection products. You find it more in smaller boats than big boats. The Coast Guard documentation fee can be put into the loan in many cases. Some of these things are dictated by other factors. Say you’re putting 10 percent down but have 8 percent sales tax. Well, that’s probably not going to fly, because now you have only a 2 percent equity.
Another request that comes to mind is when we’re asked about financing a condo slip and the possibility of putting it in the loan with the boat. The answer is no, for the simple reason that one of the assets will likely be sold before the other. This can be a real dilemma in what valuation is then assigned to the remaining collateral, and will it support what’s left of the loan balance. That just puts you in a box of snakes and you don’t want to be there.
Boat lifts are another dual-collateral request we get, more prevalent in a salt environment. They’ve become more popular because people don’t want those hulls in a salt environment 24/7. I was just down in Tampa for a meeting and was out and about into a couple of different marinas, and these lifts are even more popular than I thought. They were everywhere, and when you’re lifting a 40-, 50-foot boat with cables and hydraulics, that stuff is not for the faint of heart from a price standpoint. Therefore, you have the same dilemma with lifts that you have with condo slips.
The best case for the purchasing public is to buy and finance your boat as a standalone transaction. Then if you looking to purchase a lift, a condo slip, etc., contract it on its own.