Funding the Dream

A look at the state of boat financing four years after the U.S. financial crisis.

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In the June 2001 issue, Practical Sailor looked at financing boats and recommended that prospective boat buyers “stick with the pros,” using lenders that work with boat loans every day. Seven years later came the “Great Financial Meltdown,” when the failure of Lehman Brothers in September 2008 marked the beginning of the U.S.’s financial collapse. Some banks were bailed out—including some of those that made boat loans—but few lending institutions survived unscathed.

We recently set out to see what had changed in the world of boat financing since our 2001 report and the 2008 financial crisis, so we once again put ourselves in the mindset of a boat buyer in search of financing. After interviewing industry experts and related organizations on the state of the marine lending and boating industries, we sought financing help from marine loan specialists, large banks, and small lenders.

The Marketplace

To get a grasp on the current boat-buying and boat-selling marketplace, we first wanted to learn what had happened to the marine industry since the meltdown. We checked in with Ellen Hopkins of the National Marine Manufacturers Association (NMMA), an advocacy group for marine product makers.

Despite the recession, recreational boating generated $30 billion in sales and services to the U.S. economy in 2010, according to the NMMA. Final figures for 2011 will not be available until this summer, but 2011 will likely be similar to 2010 with perhaps a small uptick, signaling slow improvement. The outlook for 2012 is still a guess. People buy boats depending on how they feel about the economy and their net worth, according to the NMMA.

There are nearly 17 million recreational boats in use today in the U.S., down from 18 million in 2005, the end of a 15-year up cycle. Boats have gotten older along with their owners. In 1997, the average boat was 15 years old. Today, the average boat is more than 20 years old. There are fewer owners in their 30s and more in their 50s and 60s. Sailboat owners are the grayest of the boating crowd with over 70 percent of them being 50 to 75 years old or older. The good news for the marine industry, however, is that there are more people in the U.S. participating in boating than ever before: 75 million in 2010.

There were 1.1 million pre-owned and new powerboats and sailboats sold in 2010, including 180,000 personal watercraft; this was a 4-percent decrease from 2009. Of the 1.1 million boats sold that year, 26,800 were sailboats, and 22,500 of them were pre-owned. (NMMA’s figures for pre-owned include only boats that are registered; these tend to be larger sailboats with engines.) Of all the boats sold in 2010, 83 percent were used. The historically large percentage of used boats sold is likely a result of consumers looking for lower prices in the pre-owned market, according to NMMA.

If you need to sell your current sailboat before stepping up, don’t expect it to happen overnight, unless you can offer a bargain selling price. Brokerage sailboats were averaging 305 days on the market for the first eight months of 2010, according to www.yachtworld.com.

The bottom line is that we’re seeing an industry off substantially from its highs. Since 2006, new boat sales have declined 55 percent. Only 1 percent of boats sold are longer than 40 feet. On the other hand, everyone we talked to for this article agreed that current trends mean this is the best boat-buyers market ever, with both new- and used-boat sellers anxious to sell at very reasonable prices and marine lenders offering some of the lowest rates in history.

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The Marine Lenders

Given the effects of the recession on the marine industry, we expected to find a similar story for those in the business of loaning boaters the money to buy boats. We wondered whether lender contraction would impact our ability to get funded for a boat purchase. We turned to Peggy Bodenreider, a director of the National Marine Bankers Association (NMBA). Bodenreider is also Western regional manager for Sterling Acceptance Corp., a marine financing firm.

NMBA is a membership organization for marine lenders and a good source for knowledgeable marine loan specialists. We found that not all marine lenders belong to NMBA, but most do. In 2001, there were 70 marine lenders in NMBA; now there are 42, a telling statistic. This group is broadly divided into loan originators (loan brokers) and banks (lenders), although some are hybrids, doing both origination and the actual banking or lending.

At one point following the 2008 meltdown, there were only four national banks involved with marine lending —the rest had pulled out. “I don’t think banks left marine lending because it was a risky business,” Bodenreider explained. “They may have had other problems, and it was simply a matter of priorities.”

In fact, throughout this recession, marine loans have had lower delinquency rates than other kinds of consumer loans, peaking at 2.26 percent in 2009, according to NMBA statistics. A few more regional banks have entered or re-entered the field, putting the number of major marine lenders at eight, and more are likely to return as economic conditions improve. Chances are good that a bank in this small cadre of lenders will provide your funding.

Bodenreider assured us that despite the reduced number of lenders, there was still plenty of money around to fund our dream boat—provided that we have the right “qualifications.”

Boat Loan Specialists

To determine whether our 2001 recommendation to stick with the pros for boat loans was still valid, we surfed the Internet and called banks, large and small, in an attempt to get a boat loan. We found that while the banks offered boat loans, there was not a person that we could immediately talk to who knew the subject in detail.

The folks at our local Bank of America branch knew that the bank did boat loans—but nothing more. They directed us to a Web page to submit an application. Maybe we would find marine specialists eventually through their Internet process, but we weren’t sure. We love the Internet for buying books and parts for our diesel, but we are admittedly old-fashioned when it comes to getting funding for and purchasing something big like a boat. We wanted to talk to a knowledgeable person right away.

By comparison, the marine loan specialists we talked to knew all about the boat loan process. They impressed us by rattling off makes and models with a good grasp of the market value of boats we liked.

“It is all about Know Your Customer, KYC, and this is what the lenders pay us for,” said Lang Ryder, of Seacoast Marine Finance, a division of Seacoast National Bank that originates loans for their bank as well as placing loans with other marine lenders.

KYC has always been a fundamental banking concept going back to the earliest times. It is a very good idea to know exactly who you are lending to. Somehow, the KYC concept went seriously adrift in the home mortgage industry. Maybe because banks thought real-estate prices would always go up, and the loans were guaranteed by the feds, securitized, and sold off. Whatever the case, the meltdown forced a return to basics at all banks, and KYC is being much more broadly enforced. Expect to reveal the minutest details of your financial life as you seek funding.

As Ryder told us, “Our job is to make the best presentation of you to the lender.” Through KYC, Ryder selects specific lenders he works with that he thinks will be most likely to approve your loan. For example, he cited a client that had a 620 credit score. Post 2008, a score below 700 would typically result in immediate rejection. But he found that there were explainable circumstances for this score. Also the applicant’s wife, with a better score, would co-sign the loan, and they both had assets and income that Ryder felt could be presented to the bank to obtain approval.

You are not going to get a better rate by trying to figure out who the lenders are and then going directly to them. “The lenders protect their originators. Also they depend on the originators for feet on the street and completion of the critical KYC process. Otherwise, the banks would have to have staff to handle all the loans they take in, increasing their fixed costs,” Ryder said.

Most boat dealers and brokers can direct you to boat loan specialists, but be sure to check the recommendations first. You can get a general idea of the experience and size of the specialist company you are considering by first looking at their website. Is the website all sales pitch and no content? Do interviews. You want to have a clear understanding of what the specialist is going to do with your sensitive financial information. “You don’t want a mom and pop shop,” Ryder said. “Be careful of lenders who might shotgun your application to multiple lenders to see what sticks.”

Applying to multiple marine specialists to shop for the best deal might seem like a good idea, but we learned that this might not accomplish much in reality. And there is some evidence that multiple pings can negatively impact your credit score as well. Also, because the marine lending community is so small, your application will likely go to the same set of lenders, and you will end up with similar results. It’s better to find one experienced specialist and work closely with them, keeping your loan applications targeted.

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Cash vs. Financing

At presstime, we found rates of 4.99 percent commonly advertised for a $100,000+ boat loan. With money market instruments and CDs paying next to nothing and the S&P 500 essentially flat for 2011, your return on investments for last year is likely as lackluster as ours. It might be better to use cash for much or all of your purchase since your investment returns may struggle to beat current loan interest rates. On the other hand, as we go to press, we see the market on a tear since the beginning of 2012, returning close to 2008 levels. No one seems to know whether this will continue or whether there will be another deep pullback, so the evaluation of using cash versus financing requires careful consideration, especially with this being an election year.

“Cash has always been the biggest competitor for the marine loan industry,” Bodenreider said. “But we try to get people to look at the big picture.”

For example, Bodenreider said that a quality portfolio of municipal bonds could be expected to yield 5 percent tax free. Add the mortgage interest deduction if your boat qualifies as a second home, and it might be better to hold on to that cash and invest in municipal bonds. (IRS Publication 936 states that a boat can be considered a second home if it has sleeping, cooking, and toilet facilities.) Or maybe you have identified a stock that will perform as well as Apple has. Still, Bodenreider admitted, considering investment returns for 2011, the economics of financing versus cash is a push. But keep in mind that once you pay cash for the boat, that money is spent, and you can’t get it back. It’s a purchase, not an investment.

Bodenreider pointed out that equity loans are not available on boats, so don’t expect to be able to borrow against a free-and-clear boat in the future. Many boat loans have no prepayment penalty, so it may be better to borrow when you can and pay it off early than find yourself in a cash crunch later.

Suppose you decide on cash, and you are working with just the current owner. Then there is no broker, dealer, or marine loan specialist to guide you. One option would be to obtain Settlement Services from a company like BoatU.S. to help guide you through the process.

We spoke to Charmion Addington, vice president of BoatU.S. Marine Lending (www.boatus.com). “This is why we separated settlement services from our marine loan process,” Addington said. “We use the same rigor that we apply when processing a marine loan to make sure all of the important steps of the transaction are covered.”

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Borrowing Against your Home

Buying a boat using home equity, if you have any left, is an option. You can generally deduct the interest you pay on the first $100,000 of a home equity loan. But if you finance more than this amount using a marine loan for a boat that qualifies as a second home, you can deduct the interest on loans that exceed $100,000.

We don’t like the idea of using our home as a credit card. Remember a boat is something you want—not something you need. Once you put your home equity cash into a boat, you more than likely will not be able to borrow against the boat to handle an emergency.

 

Finance Products

Most companies offer simple-interest fixed-rate loans and no prepayment penalties. While the home mortgage industry has seen an increase in “junk fees” since the meltdown, the experts we talked to assured us that this had not happened in the marine loan industry. You will pay a fee for Coast Guard documentation (approximately $530), state registration, etc., but that’s about it. Still, we recommend asking about fees.

Ryder at Seacoast told us that there are many more loan products available now than in 2001 due to the highly competitive lending environment leading up to 2008. For example, a variety of variable-rate loans are available under 4 percent (as of presstime). But we’d worry about variable-rate products with the Federal Reserve effectively at 0. Rates would undoubtedly go up as soon as we committed to a variable loan.

Addington at BoatU.S. told us that most folks they work with today are going with the fixed-rate product. But Ryder gave examples of how variable-rate loans had worked well for some of his clients and said that there was every reason to believe that interest rates would stay low for some time to come.

While it is not impossible, it is very unlikely that you will find the zero-down loans we found back in 2001; 20-percent down payments are the norm today. Loans can be stretched out for 20 years or even 30 years for very large loans. We found loans for as low as $25,000 with terms up to 15 years. As with any loan, we think it is best to go with the shortest term you can afford. You will build equity faster and reduce the amount of interest paid.

Rates

With marine loans, rates go down as you borrow more money. As of this writing, we saw published rates of 4.99 percent for loans over $100,000 and 6.12 percent for loans as low as $25,000.

The NMBA does not track boat loan interest rates, but according to Bodenreider, the rates are usually closely tied to three- and five-year Treasury constant maturity rates because the average boat loan turnover rate is about 42 months, so lenders fund with money borrowed on a matched term. The spread has probably averaged 3% to 5% over the past 10 years, she said.

Many lenders do not publish their rates, because not every applicant qualifies for the same rates. Those that do publish rates have fine print indicating your actual results may vary. It is only by going through the KYC application process that a final rate determination is made.

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Collateral

With a marine loan, the collateral is the boat. Most lenders today will only lend money for fiberglass or aluminum boats. Loans are readily available for boats 20 years and younger. If the boat is 20 to 30 years old, your application will be considered, but you almost certainly will pay a higher rate and have a shorter loan term. We found that some lenders will refuse to provide funding for people who intend to live aboard full time. The reasons were not clear, but if you plan to live aboard, be sure to ask whether this will impact your loan.

The lender verifies the collateral value by checking sources like BUC Books (www.buc.com), NADA Guides (www.nadaguides.com/boats), and www.Yachtworld.com. This information is then compared against the marine surveyor’s condition report. However, everyone agrees that valuing the collateral is as much art as science, especially in a slower market where frequent comparison of selling prices is more difficult.

The lender will want to know about any liens or other encumbrances on the boat such as a loan that must be paid off. Larger boats will qualify for Coast Guard documentation, which has become a national form of registration and allows for tracking a boat’s origin and ownership. To be documented, a boat must measure at least 5 net tons. Most boats over 27 feet long will generally qualify. A bank can then file a Federal Ships Mortgage to secure the loan.

Smaller boats will qualify for state titling. For non-title states, if there is a lien on the boat, a Uniform Commercial Code (UCC) is filed with the county or state of registration to show there is a lien. Marine loan specialists can help you through this important part of the process.

Insurance

Another factor to consider when considering a used boat, especially an older used boat, is whether you’ll be able to get it insured for the amount you’re planning to pay for it. Lenders require that the boat be insured for the full market value or purchase price; generally, the insurance carrier will insure the lesser of the two.

Lenders also require Agreed Value coverage, which means that in the event of a total loss, the insurer will pay the amount agreed upon when the policy was written with no depreciation (unless another amount is agreed upon in writing by the insured and insurer). Most lenders allow a maximum 2 percent hull deductible and require Protection and Indemnity coverage of $300,000 minimum. Another important stipulation is that the name on the insurance policy must be the same as the name on the title and loan documents, and the lender must be named as the loss payee.

Older boats, unique boats, and those that are widely navigated may require specialty insurance, where carriers are limited. This could drive the cost of coverage higher than expected, so it’s a good idea to talk to an insurance specialist before you get too far into the buying process. Lenders work with a wide variety of insurance agents and can typically provide recommendations.

Pre-Approvals

If you know the type of boat and price point you are looking for, you may want to get pre-approved for a loan, so you have the money when you find the boat you want. It can also help you to understand what you can realistically afford, and negotiations with the seller are typically improved if he/she knows that you have funding—plus brokers will be happier taking time to let you explore the dark places in the bilge.

Addington, of BoatU.S., suggested another way to do a pre-approval. Find the exact boat you want, then get pre-approved and make an offer on the boat. In this market, the boat will probably still be available when you are ready.

The Repo

Peering into the dusty windows of abandoned homes in our Sarasota, Fla., neighborhood, we knew the properties were in some phase of foreclosure. The former owners had obviously left in a hurry. Yet just down the street, we saw foreclosed homes that had been re-sold and smartly renovated. We wondered if a similar opportunity might exist with boats.

Marine liquidators or “re-marketers” work closely with lenders that have soured boat loans. We spoke with Matt Amata, president of National Liquidators, one of the largest.

“The idea that boat repos are floating wrecks is wrong,” Amata said. “We take care of the boats in our inventory and make sure they are in good condition for sale.” We saw sailboats that interested us in National Liquidators’ inventory, but the list was mostly powerboats. When we asked Amata about this, he explained that there were two reasons. “First, sailboats make up a small percentage of the overall boat population, and our inventory reflects that. Second, sailboat owners default less than powerboat owners. They are more prudent buyers and also have not been rocked by high fuel costs.

“Buying a repo is not for the faint of heart,” Amata cautioned. “It’s the ‘As Is Where Is’ language the buyer must agree to that scares people away. Essentially, this means that if the boat sinks moments after your purchase, it’s your problem.”

However, Amata said that repo buyers have the opportunity to check out the vessel completely with sea trial and survey just like any other purchase and make an intelligent decision.

Borrower Qualifications

Like Amata, many of the people we spoke with for this report told us that sailboat owners were typically a careful and deliberative group that is less likely to default on a loan. Being long-time sailboat owners, we therefore expected to be warmly embraced by the lenders. But Addington at BoatU.S. didn’t think this would make any difference. “It’s just about the numbers today,” she said. “People with the right qualifications will get funding.”

Wondering whether we could ever be considered “qualified,” Bodenreider told us that lenders give careful consideration to what she calls the “6 Cs”:

Character: Your overall stability, how long you have been at your job or profession and lived in your home.

Capital: Your asset base. Can you afford the down payment, and do you have reserves if something happens to your income?

Capacity: Your ability to handle your debt load, supported by your income, including the added expense of owning a boat.

Credit History: How you have performed paying back other loans of comparable size. The credit score (700 or above) is one measurement lenders use.

Cash Flow: All your verifiable sources of income, less losses.

Collateral: The value of the boat you want to buy.

Conclusion

We don’t regret the loans we’ve taken to buy our boats. They bought us a lifestyle we love. And, according to people in the know, there has never been a better time to buy a boat. It’s a buyer’s market, and funding is available at very low rates.

We still recommend working with specialists that handle boat loans every day. Even if you have the cash, consider the big picture to determine whether keeping assets invested is smarter for you. After all, the next big rally could be right around the corner.

While it will be more difficult to get qualified for funding in the post meltdown world, we found that money is available.

Darrell Nicholson, editor of Practical Sailor, grew up boating on Miami’s Biscayne Bay on everything from prams to Morgan ketches. Two years out of Emory University, after a brief stint as a sportswriter, he set out from Miami aboard a 60-year-old wooden William Atkin ketch named Tosca. For 10 years, he and writer-photographer Theresa Gibbons explored the Caribbean, crossed the Pacific, and cruised Southeast Asia aboard Tosca, working along the way as journalists and documenting their adventures for various travel and sailing publications, including Cruising World, Sail, Sailing, Cruising Helmsman, and Sailing World. Upon his return to land life, Darrell became the associate editor, then senior editor at Cruising World magazine, where he worked for five years. Before taking on the editor’s position at Practical Sailor, Darrell was the editor of Offshore magazine, a boating-lifestyle magazine serving the New England area. Darrell has won multiple awards from Boating Writer’s International, including the Monk Farnham award for editorial excellence. He holds a U.S. Coast Guard 100-ton Master license and has worked as a harbor pilot and skippered a variety of commercial charter boats.

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