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Very few exterior contracting companies are as savvy about offering home improvement finance as American Siding & Windows, Urbandale, Iowa. The $18 million company conducts 75 percent of its business via loans and sees finance as a critical tool for growth, particularly in this softer economic environment. The sub-prime mortgage fallout, along with possible risks of a recession, however, have spurred many lenders to examine their loans with greater scrutiny. Not surprisingly, there have been tweaks to terms and conditions of unsecured loans, and the number of finance companies willing to make secured loans has declined. American Siding’s co-owner Pat Pagano and finance manager Dennis Bracewell offer their outlook.
QR: Are you seeing reductions in loan limits along with changes to other terms and conditions?
Pagano: The answer is yes. Banks are becoming a lot more careful whom they lend to. The biggest example was that banks and financing companies were offering secured financing and now they are just into unsecured loans. That is obviously a huge difference right there. Some of the banks are not going as long as 240 months for a term. Previously, many banks, especially for unsecured loans, would offer 240 months. The other issue is that one popular way to get your loans approved — particularly if the homeowner had good credit — is to use “stated income” loans. This means the income that the homeowner told you, even though they did not verify it, was enough for the approval because their credit score was so high. In the mortgage industry — not in our industry — they call those “liar loans.” A lot of banks have gotten away from these stated income programs because they have gotten hurt by it.
Another sign that they’ve tightened their belts is a lot of them are requiring more stipulations or verifications before they fund a loan. Some financing companies that were taking borrowers with the worst credit, their “discount,” which means their “chop,” or what they charged us, has gone up quite a bit. There are a number of companies that have offered sub-prime financing in our industry. And these players over the past six to nine months have raised their discount from 17 percent to 20 percent and now 27.5 percent. And that means if they approve this loan, they are charging you, the contractor, 27.5 percent of the sale price of the project to take it. And the reason why their discount or their fee has gone up, is because, obviously, there is a lot of bad debt out there. So, it has affected everybody, from the financial companies and banks that deal with people with very good credit, to the sub-prime chop houses that don’t deal with good credit.
Bracewell: It is getting tougher. There are banks getting out of the secured business. Major players in the industry have changed their programs and it is getting tough.
