As part of securing an aircraft loan, an underwriter will need to review the following: 1.) Credit Application, 2.) Credit, 3.) Cash Flows, 4.) Net Worth, and 5.) the Aircraft information itself. As a part of an educational series, we will address each of these components separately and review some of the questions the lender tries to answer through analysis of a client's credit package. This should provide some insight into what a loan officer is trying to accomplish by requesting certain information.
Credit Application and the information contained therein:
1. Who is the client? The credit application starts with a brief overview to give a lender an idea of who the client is, where they live, how long they've lived there, and often times a snapshot of their aviation experience. This provides basic info on how to reach the client, and gives the lender a general sense of who they are considering lending to.
2. How is the aircraft being registered? The Application reflects the structure of the transaction requested. For example, if a husband and wife are co-borrowers for a loan, or if the aircraft is to be held in a single-purpose entity for tax or liability purposes, it will be outlined in the Application. The Application also identifies the owners of the company to give a lender a sense for who is authorized to sign on behalf of the company if a guarantee is involved.
3. How does the applicant make their money? The Application identifies the customer's occupation - their specific title along with the type of work they do. For example, an applicant may be the President of the company but a lender will want to know what type of work the company engages in. In addition, the lender is looking at how long the applicant has worked for this employer and/ or in this specific profession. This provides a sense of job and income stability. It's not uncommon for a lender to request more information on the company at this point, to get a better sense of the profession, industry and evolving picture of the applicant.
4. What type of financing is being requested? An overview of the financing request is included in the Application - what is the Applicant buying and how much are they looking to finance? This includes the specific figures (purchase price, down-payment, loan amount), as well as an overview of the type of aircraft (year, make, model), and the intended utilization of the airplane. In the case of a pre-approval, much of the aircraft-specific information is left empty, but a lender will often want a general sense of what the client's buying within the outline of a given purchase price and loan amount.
5. What is the client's personal financial situation? A short personal financial statement gives a general overview of the client's assets and liabilities. This is usually provided through a simple form with the application, or an applicant may attach their own personal financial statement. Finally, some basic questions that are often not answered elsewhere are included on a Credit Application. These questions may include citizenship, any significant derogatory credit issues (i.e. bankruptcy) that may not be included on a credit bureau report if too old, and any contingent liabilities, alimony or child support payments (often not included or accurately reflected on tax returns).
Thursday, July 23, 2009
Questions Loan Underwriters Ask - Part 2
As part of securing an aircraft loan, an underwriter will need to review the following: 1.) Credit Application, 2.) Credit Report, 3.) Cash Flows, 4.) Net Worth, and 5.) the Aircraft information itself. As a part of an educational series, we are addressing each of these components separately and reviewing some of the questions the lender tries to answer through analysis of a client's credit package. This should provide some insight into what a loan officer is trying to accomplish by requesting certain information.
In this article, we'll discuss an applicant's Credit Report:
1. What is the client's Credit Score? Each lender has a set of lending policies/ credit policies within which they must operate. Often times, this credit policy outlines the minimum credit score acceptable to the financial institution. The average credit score in the US varies by credit bureau, but currently ranges from 692 to 723. In the late 1990s, the FDIC (the auditor of federally-insured banks) issued a memorandum identifying a credit score of 660 as a break-point between risky and non-risky borrowers. Lenders were still able to lend to borrowers with lower scores, but needed to provide documentation and a good explanation when the loan was written below this level. The same situation applies today (although lenders are a bit less likely to make exceptions), but a credit score of 700+ is what most aircraft underwriters are looking for in today's economy.
While mortgage and credit card companies may vary their rates depending on the credit score, you will not often see a variance in rate offerings based on a clients' credit score with an aircraft loan, as it is a very niche market and all borrowers are typically required to be A-credit quality.
2. How does the applicant manage their credit (payments)? The most important part of the credit report is information about the customers' payment history, as 35% of an applicant's "credit score" is driven from payment history. Do they pay their obligations on time? Historically, have they shown they pay their debts within the terms as agreed with the creditor? The credit report gives a 7-year payment history and ideally, underwriters are looking for minimal delinquencies. Specifically, lenders are looking at the most recent two years' payment history, as this has the greatest impact on the credit profile. If there are more than a hand-full of recent late payments, lenders worry about the reliability of the applicant regardless of their current income level or job title.
The credit report also reveals other significant financial information regarding the applicant's credit history - tax liens, legal judgments, and bankruptcies. Even if the credit score is satisfactory, a bankruptcy, unpaid tax lien, unresolved judgment, or other large blemish may disqualify the applicant.
3. What is the debt-load and what type of debt do they have? The 2nd most important element of the credit report (30% of the score) revolves around how the applicant manages their credit - the amounts owed relative to the credit extended. This may include the total amount of credit extended and the type of accounts. Since the credit report breaks down each obligation separately, it gives a good sense of the types of debt the customer has. Mortgage? Car? Home equity line? Revolving credit card debt? Credit is typically organized into real estate, installment, or revolving debt, and analyzed in these three categories. Generally, keeping revolving balances low (i.e. credit card debt) relative to the total balances available will improve your score. The underwriter will also take debt-load into account for the analysis of the customer's available cash-flow for the purchase.
4. What experience does the client have with managing credit? Do they have comparable credit? Since aircraft are generally an expensive purchase, underwriters use the credit report to get comfortable with the customer's ability to handle this level of debt. Specifically, has the client managed a debt at or above the same size as that requested for the aircraft loan? In most cases, this is covered with the client's home ownership, as it is often the largest debt held by an applicant, and usually exceeds the loan amount. In addition, a lender is looking at general credit - length of time with managing the specific credit accounts - which can comprise up to 15% of an applicant's overall credit profile. In a nutshell however, it may be more difficult for an underwriter to approve a loan without a history of comparable credit.
5. Has the Applicant been attempting to secure a lot of new credit recently? There are 3 credit bureaus (Equifax, Experian, and Trans Union). Historically, local bankers would only report to their local credit bureau, or just one of the bureaus, which is why a lender is more apt today to pull all three bureaus to get a complete credit history. Each of the 3 bureaus address inquiries differently, but generally the bureaus feel that a client attempting to secure a lot of new credit - and varying types - at the same time presents a "risky" credit profile. As backup, FICO reports that "statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports". However, exceptions are made for clients rate-shopping within a 30-day window for the same types of credit (FICO is currently extending this to 45 days).
End
In this article, we'll discuss an applicant's Credit Report:
1. What is the client's Credit Score? Each lender has a set of lending policies/ credit policies within which they must operate. Often times, this credit policy outlines the minimum credit score acceptable to the financial institution. The average credit score in the US varies by credit bureau, but currently ranges from 692 to 723. In the late 1990s, the FDIC (the auditor of federally-insured banks) issued a memorandum identifying a credit score of 660 as a break-point between risky and non-risky borrowers. Lenders were still able to lend to borrowers with lower scores, but needed to provide documentation and a good explanation when the loan was written below this level. The same situation applies today (although lenders are a bit less likely to make exceptions), but a credit score of 700+ is what most aircraft underwriters are looking for in today's economy.
While mortgage and credit card companies may vary their rates depending on the credit score, you will not often see a variance in rate offerings based on a clients' credit score with an aircraft loan, as it is a very niche market and all borrowers are typically required to be A-credit quality.
2. How does the applicant manage their credit (payments)? The most important part of the credit report is information about the customers' payment history, as 35% of an applicant's "credit score" is driven from payment history. Do they pay their obligations on time? Historically, have they shown they pay their debts within the terms as agreed with the creditor? The credit report gives a 7-year payment history and ideally, underwriters are looking for minimal delinquencies. Specifically, lenders are looking at the most recent two years' payment history, as this has the greatest impact on the credit profile. If there are more than a hand-full of recent late payments, lenders worry about the reliability of the applicant regardless of their current income level or job title.
The credit report also reveals other significant financial information regarding the applicant's credit history - tax liens, legal judgments, and bankruptcies. Even if the credit score is satisfactory, a bankruptcy, unpaid tax lien, unresolved judgment, or other large blemish may disqualify the applicant.
3. What is the debt-load and what type of debt do they have? The 2nd most important element of the credit report (30% of the score) revolves around how the applicant manages their credit - the amounts owed relative to the credit extended. This may include the total amount of credit extended and the type of accounts. Since the credit report breaks down each obligation separately, it gives a good sense of the types of debt the customer has. Mortgage? Car? Home equity line? Revolving credit card debt? Credit is typically organized into real estate, installment, or revolving debt, and analyzed in these three categories. Generally, keeping revolving balances low (i.e. credit card debt) relative to the total balances available will improve your score. The underwriter will also take debt-load into account for the analysis of the customer's available cash-flow for the purchase.
4. What experience does the client have with managing credit? Do they have comparable credit? Since aircraft are generally an expensive purchase, underwriters use the credit report to get comfortable with the customer's ability to handle this level of debt. Specifically, has the client managed a debt at or above the same size as that requested for the aircraft loan? In most cases, this is covered with the client's home ownership, as it is often the largest debt held by an applicant, and usually exceeds the loan amount. In addition, a lender is looking at general credit - length of time with managing the specific credit accounts - which can comprise up to 15% of an applicant's overall credit profile. In a nutshell however, it may be more difficult for an underwriter to approve a loan without a history of comparable credit.
5. Has the Applicant been attempting to secure a lot of new credit recently? There are 3 credit bureaus (Equifax, Experian, and Trans Union). Historically, local bankers would only report to their local credit bureau, or just one of the bureaus, which is why a lender is more apt today to pull all three bureaus to get a complete credit history. Each of the 3 bureaus address inquiries differently, but generally the bureaus feel that a client attempting to secure a lot of new credit - and varying types - at the same time presents a "risky" credit profile. As backup, FICO reports that "statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports". However, exceptions are made for clients rate-shopping within a 30-day window for the same types of credit (FICO is currently extending this to 45 days).
End
Wednesday, July 1, 2009
A Sense of Where We Are
Activity
Here at AirFleet, we can attest to an increase in activity in prospects shopping for aircraft. During the past four weeks we visited over 55 airports around the country, and the feedback we received universally from aircraft sales professionals was that activity has started increasing, and in some cases above 2008 activity levels year-to-date.
But don't just take our word for it, here are some comments from well-respected sources in our industry to support what we've been seeing and hearing recently. According to Vref (the Aircraft Value Reference) in their most recent quarterly newsletter, "activity us up almost across the board". In addition to this, Controller Magazine reflects a 3.4% decrease in for-sale inventory over the past 60 days. Perhaps the most pertinent comments came from UBS in their Business Jet Monthly report published last week - noting that their "straight up measure of absolute business conditions increased for the first time in over a year". In their survey of customer interest, USB reported a "42% increase in customer interest" in the past month.
Aircraft Values
According to UBS in their Business Jet Monthly report, inventories remain at record high levels but "finally look to be stabilizing". With respect to values, "despite stabilizing inventory levels, used pricing continues to fall, with average asking prices for most young aircraft models 30-40% below peak levels and off another 3-4% over the past month". However, on the lighter aircraft side, Vref reports in their June newsletter that there was "no change in the Vref Light Single Index" - reflecting that "most light piston singles have stabilized" in value.
Interest Rates
Overall, underlying rates have stopped their downward slide and have actually crept up a good bit in the past 3 months (they bottomed-out around mid-March). As of June 30th, 3-year treasury rates had crept up a half-point since March 18th, while 7-year treasury rates had crept up over a full point over the same period (although they have both dropped from higher peaks earlier in June). Consider this when evaluating an aircraft loan - according to Bankrate.com, interest rates for a new car, unaided by a manufacturer- or dealer-sponsored rate buydown, were at 7.29% for 4 years last week (a similar used car loan was at 7.89% for 4 years). Aircraft loan interest rates comparatively start in the low- to mid- 6's today and can be fixed for up to 20 years.
Financing Appetite
Bank appetite varies on a number of items, not the least of which includes current default activity. If a lender is engaged in recovering assets from current note-holders, their focus may not concern ongoing expansion of their loan portfolio. From a practical standpoint, if the Titanic is sinking, the Captain isn't thinking about how to design a better boat, he's focused on preserving the ship and the people in it. With a decrease in the current level of defaults, and a growing desire in the banking community to start booking loans again, the lending system is starting to repair itself. As the market starts to heal and the banks start to heal, appetite will continue to return.
Reflective of this, UBS reported "improved financing availability" compared with conditions in March in their Business Jet Monthly. This month financing availability (worldwide) moved into the positive territory for the first time this year, a clear sign that appetite is returning to the finance market.
Although the dust hasn't completely cleared, we are seeing things start to shift and are optimistic that with increased confidence and buyer's realizing the great market they find themselves in today, conditions are starting to improve.
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