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Where Have All the Checkbooks Gone?

Banks and other lenders have become overly tightfisted. They point to the state of the economy and fallout from the housing bust as justification for their current actions. They also note an increase in non-performing boat loans and repos. With all that, one might think the banks are victims. Truth is, they are . . . but it’s primarily of their own greed!  Looking back for a moment, it’s hard to identify exactly when banks abandoned their 100-year-old sound business model of loaning money, setting a fair spread, and having the borrower repay the loan and interest in an agreed number of payments. But clearly they did.

During the last few years, lenders actually dumped the idea that being repaid by the borrowers was important. Instead, attracted by the growing amounts of consumer debt coming from instruments ranging from home mortgages to boat loans, banks began packaging these into securities and raced each other to sell them to investors. In such a scenario, repayment of the loans took a back seat to the revenue generated from fees and charges lenders and brokers could immediately get when the loans were made.

Even the Chief Council of the Comptroller of the Currency, Julie L. Willliams, was reported by the New York Times as saying: “Today, the focus for lenders is not so much on consumer loans as being repaid, but on the loan as a perpetual earning asset.”

In hindsight, it’s now easy to see this was a breeding ground for deals like no down payment, interest only payments, loss leader ARM’s and so on. Moreover, less than 10 years ago, there weren’t any mortgage brokers hustling deals to banks. Brokers multiplied like rabbits during the real estate boom. The banks, in turn, were in such a hurry to assemble loan portfolios to sell to investors that they (1) didn’t bother to check out the information about the borrower and (2) acted like it was impossible to lose money in real estate! But wait, there’s more.

Colliding with all this is the fact that we’re in a time when banks no longer have their own money. America isn’t exactly the land of savers. “Gone are the Christmas Clubs accounts and the little old ladies with healthy passbooks,” explains Bill Otto, marine lending representative for Key Bank and former president of the National Marine Bankers Association. “A bank’s money is now borrowed and that cost of capital is high compared to the old days when there was access to lots of fat savings accounts. Then, a lender must add to the cost a decent spread. It all means the landscape has changed again.”

So, where are we now? Like it or not, lenders have been forced to go back and follow their own rules of the past as they recover from the mess they, in a major way, put themselves in. It means today, customers must put in some real equity. In addition, the 4.5%-rate train has left the station. But rates aren’t 21%, either.

According to Otto, there is plenty of money to lend. Its availability today simply mirrors the earlier times when initial equity and a customer’s ability to repay are the basis for making the loan. It’s funny but true – the more things change, the more they seem to return to traditional principles.

Comments

10 comments on “Where Have All the Checkbooks Gone?

  1. dave boso

    Congress had a bunch to do with thehousing thing the required banks to make loans to groups of people thatneither the means nor the wherfor all to repay those loans when the rates increased.

  2. Ed McKnew

    Like Bush said, Wall Street got drunk. The collapse of the mortgage-backed security market caused big-time investor pain both here and in Europe.

  3. gene o riley

    You are exactly right and the biggest example of the perpetual interest loan is the national debt. The reason the banks dont have mom and pops savings to loan is because they dont pay a decent interest rate. The Fed or central bank doesnt want them to loan your savings but borrow from them at prime rate; but the banks wont pay you the same rate or even close. The Fed or central bank wants control of it all.

  4. Ronald Longman

    Well how about a wake up call to all those in the “easy money Greed” banking business. The above writer is 100% correct. Why is it that the proven method of executing a loan – repayment – loan paid off – ownership is any different. If you cannot afford a considerable down payment, cannot reasonably afford the monthly payment over the term of the loan, 1) Why would you take the loan, 2) Why would the lending institution risk the potential loss of it’s investors money, 3) Why would management approve the loan? Bottom line, fast bucks and greed. Those who approved those loans, and took the risk, should be responsible for the loss. If heads roll, so be it. Take the lesson to heart. There is no easy money. A gamble has two ways to go. Deal with it.

  5. dan

    NORMAN, with all due respect, your article would be more at home on a real estate mortgage broker website. There is very little mention about how the current banking mess relates to the marine industry and what it means to the average joe that tries to get a boat loan.
    It’s almost as if only half the article was published.

    I know of Bill Otto, and he is very knowledgeable and well respected person in marine lending, but you should have consulted with other marine lenders in order to get several different perspectives, and concentrated more on what this “TIGHTFISTED” lending environment means for dealers and customers.

  6. Lenny

    Not only did the banks get drunk, so did the home builders, brokers, the boat builders, dealers and secondary market. Everyone benefited from the banks making those loans in selling their products and stuffing the money in their pockets or in adding overhead. Anyone with a brain in their head had to realize it was only a matter of time before the lending market crashed. When you are allowing people to make loans with 350 credit scores or to 65% of their household GROSS income on variable rate instruments the probability of problems is 100%. Now we are back to reality with a glut of homes, boats and other toys on the market that people could never really afford in the first place…. the pricing adjustments and reality of who your customer really is (ie the people who REALLY can afford the payments) have only just begun to set in. All those who took the money and spent like they were drunk will find their way out of business. Those who realized the end of the train would come and smartly saved and invested the money will live on and THRIVE in a new re-defined market

  7. AnonymousBob

    Norm:
    The “tightfisted” lenders are becoming the Sales Prevention department! The biggest complaint I hear in my sphere of coverage is the fact that lenders are not buying loans unless scores are 750+ and the customer puts 50% down (yes, there is a bit of sarcasm there). Even then, the lenders are practically looking for any reason to say no. It’s almost laughable the 180 the banks have made in their lending standards because, as mentioned, of the mess they brought on themselves. Some markets in the nation are suffering miserably due to the credit “crisis” brought on by the housing speculation of a couple years back.

    To Dan:
    Norm’s article is all about the marine industry and how the “drunken greed” of banks, Wall Street, brokers, etc. has created a lack of credit available for our bread-and-butter buyers. Because of lendeers being scared of their shadows now, they aren’t buying boat loan paper, which means dealers aren’t selling boats. I don’t know the exact percentage, but I’d be willing to bet over 80% of the mid-range fiberglass/aluminum boat buyers finance their purchase. If lenders refuse to buy those loans and those customers don’t have the cash reserves to buy outright, guess what? No sale is made. Hence, Norm’s article and this discussion. This credit “crisis” is affecting everyone, not just our little boating industry.

    The real problem now is figuring out how deep this wound is and if it’s infecting other parts of the body, a/k/a the world. The financial shows and publications (even the Wall Street Journal) are reporting on the slowing global economy. I know it’s a business cycle we’re in now, but I’m afraid this downturn is going to be worse than people expected. I truly hope not!

  8. Matt

    Well, being that I work for a company that the dealers use as their desktop for loan origination, and that the banks use to originate loans, I would say it is ugly out there. Yes, the credit crunch was caused by the housing sector, but the same mistakes were made in the recreational lending sector. With some of the big boys getting out of marine, such as GE, Wachovia and Key, others are following in what I call the “lemming effect”. This of course affects everyone down stream as Manufacturers and dealers are hurt by the decrease of sales. On the positive side, this allows others to enter a market that they haven’t been able to break into. Of course, I am contacted buy manufacturers daily to set-up a dealer finance program, and not all of my lender partners have exited this market. In fact, we recently just signed up new lender partners that will lend in this segment nationwide. Of course, with the decrease in competition, lenders can get back to sound lending practices and only make loans that they should be making and yes, most of our lender partners have updated their credit criteria. In the long run that is in everybody’s best interest.

  9. Arch

    BOB, your comments being SARCASTIC would be an UNDERSTATEMENT. Marine lenders are only doing what they should have done all along, buying according to their underwriting guidelines. On a much smaller level, due to all the money available, they relaxed their guidelines and did a bunch of ZERO DOWN loans and other marginal loans they shouldn’t have done. THE DEALERS BENEFITED FROM THIS.
    Nowadays, with very good credit and 10% down, marine lenders are buying those deals all day long. Yes, they are picky, but they are only doing what they should have been doing all along.
    One of the biggest problems now is not their strict underwriting guidelines, it’s the banks getting out of the business all together, such as KEY.

  10. AnonymousBob

    Arch:

    I agree about the complete lack of lending standards during the boom. Unfortunately, the mindset was spread through all industries and now we’re paying the price for our “irrational exuberance”. If the lenders had just maintained some sort of common sense all along, we’d all be in a much better place. But, hindsite is always 20-20.

    You know the credit markets are messed up when the banks won’t even lend to each other. I believe there is an old saying, “If you can’t trust your own, who can you trust?” – or something like that.

    With Key dropping out and banks not lending to each other makes me believe, unfortunately, that the wound is deep enough to require stitches, which should’ve been the “Bailout Package”. Oh well…

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