The Bad-Credit Maelstrom
Affordable is crucial, but no longer easy. Home improvement companies are like auto dealerships. Both sell products that the average person can’t afford to just write a check for. At Solarshield, for instance, the majority of projects are financed in some way or other. At Penguin Windows, more than 80% of the company’s window projects are financed, these days by unsecured loans through G.E. Money, Capitol One, First Mutual, and other top lenders.
Penguin Windows’ salespeople typically phone from the home to arrange loans through a department overseen by the company’s finance manager, Yvonne Taylor. At most home improvement companies, paying for projects is explained in terms of monthly installments, and making those installments affordable is both the salesperson’s job – to do the explaining – and the finance manager’s job, to find the loan.
But as equity lending has dried up or disappeared, and more home improvement companies seek unsecured lines of credit for their customers, affordability can be at issue. It’s why, for instance, people stopped buying cars. Analysts say that fewer lenders and tighter credit is “the No. 1 reason” for the September plunge in auto sales, down 34% for Ford Motor Co., 29.5% for Toyota Motor Corp., 16% at General Motors Corp.
“The market has changed,” says John Kuprevich, vice president of home improvement lending Domestic Bank in Cranston, R.I., which has been involved in home improvement finance for many years. “We’re starting to see some bigger players move out of installment lending and more into credit lending,” Kuprevich says. “And the number of lenders out there has changed. There are fewer lenders in home improvement because some have closed their doors.”
Tough Job
Those who arrange financing on behalf of home improvement companies found their jobs getting a lot tougher in 2008. “What used to happen is that we dealt with a few lenders and slam dunk, we’d be fine,” says Margie Flory, director of finance for Home Comfort Now, a sunroom and basement finishing company in Newington, Conn. “Now,” she says, “there’s a new market – the unsecured – that we never used before.”
Since unsecured loans or lines of credit typically require repayment in a smaller time frame, say seven years versus 30, the payments for a homeowner buying a $30,000 sunroom suddenly balloon from the $300 or so per month they would be paying on a second mortgage (secured) loan to $600or so per month, with an unsecured line of credit. That, effectively, puts the product out of reach for many.
So Flory must now find ways to make financing affordable, which typically involves searching for and combining loan products. For instance, a portion of the job may be funded with an unsecured line of credit while Flory shops for a bigger loan, which may be a Title One secured loan (HUD insured) or, if the customer has sufficient equity, another form of secured loan. All this takes phone calls and time, lots more time than it ever did before, Flory says. “Before, you sent in your paperwork and you could close it in a week. In this day and age nothing is fast.”
What has happened in less than a year is that the financial stability of the customer, and the size of the ticket, now make all the difference in getting credit. Christensen, at G.E. Money, which continues to be a large player in the unsecured lending arena, says that if “the contractor’s transaction is under $20,000, he can hook up with G.E. and we will make those loans all day long.”
Larger loans, requiring secured lending, are much more difficult to get and “even local banks,” he says, “are leery.”
That’s left many companies that specialized in higher-ticket projects scrambling to add more affordable items such as bath replacements and patio covers to their product and service menu. This year, for instance, Statewide Remodeling took on Luxury Bath, a typically $5,000 to $7,500 product installed. It offers prospects a range of sunroom-type products, including patio covers and shade covers where the average price is $8,000 to $11,000.
Still, home improvement company owners are left to wonder when all this will shake out. That will require that the housing market stabilizes, banks clear out bad loans, and that some 2 million foreclosures and re-sales are complete.
“Somewhere in the first half of 2010 it will be resolved,” Levin says. “That’s my gut feeling from talking to lenders. In trying to replace the lenders I had, that’s the time frame they’re talking about.”
In the meantime, both bankers and finance managers advise that the best strategy for managing credit is to have many companies available. “The more tools you have on your belt in the form of lending institutions, the better off you will be,” Kuprevitch advises. “You can’t just work with one or two anymore. You need to get set up with everybody and figure out the best place to put your paper.”
Editor’s Note:
Our recent story on home improvement lending unintentionally implied that companies were juggling two loans at once for the same project. Our source, Margie Flory from Home Comfort Now, points out that that’s incorrect and not allowed by certain lending companies. Typically, the procedure for many companies is to fund the project with an unsecured loan, while the home improvement companies may help the customer find a secured loan down the road.
