OT: Timeshare Credit Interest Rates

[SNA27]

@Grammarhero, I have a question relating to interest rates.

I can understand CC companies charging a high interest rate, after all they are unsecured loans.
Auto companies keep interest rates low to be able to sell cars.
Real Estate loans are secured by real property and the market being so large, low interest rates are the norm.
TS is also real property and the mortgages thereon are secured by real property.

So, are there any laws preventing TS companies like Wyndham from charging such usurious rates of 15% even for customers with best credit? Aren't there usury laws in every state?

I know Wyndham makes a big chunk from the financing operations but don't such high rates increase the default rate? I know it's % game but still, it seems to be self-defeating.
Wouldn't a 6% or lower rate be in line with home mortgage rates? What risk justifies such high rates?

Won't those rates have to come down if people refuse to buy at those rates? Why don't people walk out as soon as a 15% or higher rate is mentioned? I bet they carefully hide such things or at least not draw attention to it.

But, QC is supposed to go over the loan disclosure document line by line and explain every number on it. Is that too late by that point and people are mesmerized into signing in a rote fashion like zombies?

 

[55plus]

@Grammarhero, I have a question relating to interest rates.
I can understand CC companies charging a high interest rate, after all they are unsecured loans.
Auto companies keep interest rates low to be able to sell cars.
Real Estate loans are secured by real property and the market being so large, low interest rates are the norm.
TS is also real property and the mortgages thereon are secured by real property.

So, are there any laws preventing TS companies like Wyndham from charging such usurious rates of 15% even for customers with best credit? Aren't there usury laws in every state?

I know Wyndham makes a big chunk from the financing operations but don't such high rates increase the default rate? It seems to be self-defeating.
Wouldn't a 6% or lower rate be in line with home mortgage rates? What risk justifies such high rates? Won't those rates have to come down if people refuse to buy at those rates?

Because timeshares have basically no resell value. Look at the resell market - pennies on the dollar. Consider it an unsecured loan. It makes no sense to finance a series of future vacations. Just my opinion.

 

[Grammarhero]

@Grammarhero, I have a question relating to interest rates.
I can understand CC companies charging a high interest rate, after all they are unsecured loans.
Auto companies keep interest rates low to be able to sell cars.
Real Estate loans are secured by real property and the market being so large, low interest rates are the norm.
TS is also real property and the mortgages thereon are secured by real property.

So, are there any laws preventing TS companies like Wyndham from charging such usurious rates of 15% even for customers with best credit? Aren't there usury laws in every state?

I know Wyndham makes a big chunk from the financing operations but don't such high rates increase the default rate? It seems to be self-defeating.
Wouldn't a 6% or lower rate be in line with home mortgage rates? What risk justifies such high rates? Won't those rates have to come down if people refuse to buy at those rates?

TS mortgages are not traditionally secured real property mortgages. With most defaults, essentially only MF get paid for the foreclosure sale (if that). With foreclosure sales, TS mortgage dollar amounts get discharged.

With the exception of Disney, TS mortgages are essentially a vastly underwater mortgage whereas the great majority of the TS mortgage is unsecured. Thus, TS mortgage rates are very close to the state-limited usury rates of the state of the sale.

https://www.lendingkarma.com/content/state-usury-laws-legal-interest-rates/

 

[Crafty71]

@Grammarhero,
TS is also real property and the mortgages thereon are secured by real property.

Why don't people walk out as soon as a 15% or higher rate is mentioned? I bet they carefully hide such things or at least not draw attention to it.

But, QC is supposed to go over the loan disclosure document line by line and explain every number on it. Is that too late by that point and people are mesmerized into signing in a rote fashion like zombies?

Hey SNA27,

Methinks this is where you are mistaken...

Firstly, TS is NOT real property...at least not real property with any value because of supply and demand...it is a prepaid vacation for the next twenty (20) years. TS used to have value when there were not ten (10) people who wanted to sell for every one (1) who wanted to buy...and DVC still has value because Disney carefully controls supply and demand...until the next financial crisis...and I know plenty of people who put this year's vacation on the credit card and pay it off at 20% interest, so what is the difference (he asks rhetorically...).

Finally, the #1 reason timeshares sell is because people are on vacation and your brain works differently while on vacation...

Cheers!

 

[Grammarhero]

Hey SNA27,

Methinks this is where you are mistaken...

Firstly, TS is NOT real property...at least not real property with any value because of supply and demand...it is a prepaid vacation for the next twenty (20) years. TS used to have value when there were not ten (10) people who wanted to sell for every one (1) who wanted to buy...and DVC still has value because Disney carefully controls supply and demand...until the next financial crisis...and I know plenty of people who put this year's vacation on the credit card and pay it off at 20% interest, so what is the difference (he asks rhetorically...).

Finally, the #1 reason timeshares sell is because people are on vacation and your brain works differently while on vacation...

Cheers!

Interestingly, unless state TS laws codify separate TS foreclosure procedures, state TS foreclosures follow similar processes as foreclosed real property such as condos and houses.

 

[capital city]

@Grammarhero, I have a question relating to interest rates.

I can understand CC companies charging a high interest rate, after all they are unsecured loans.
Auto companies keep interest rates low to be able to sell cars.
Real Estate loans are secured by real property and the market being so large, low interest rates are the norm.
TS is also real property and the mortgages thereon are secured by real property.

So, are there any laws preventing TS companies like Wyndham from charging such usurious rates of 15% even for customers with best credit? Aren't there usury laws in every state?

I know Wyndham makes a big chunk from the financing operations but don't such high rates increase the default rate? I know it's % game but still, it seems to be self-defeating.
Wouldn't a 6% or lower rate be in line with home mortgage rates? What risk justifies such high rates?

Won't those rates have to come down if people refuse to buy at those rates? Why don't people walk out as soon as a 15% or higher rate is mentioned? I bet they carefully hide such things or at least not draw attention to it.

But, QC is supposed to go over the loan disclosure document line by line and explain every number on it. Is that too late by that point and people are mesmerized into signing in a rote fashion like zombies?

Yes we can make the claim that timeshares are real estate and have value. Unfortunately when you buy say 150,000 points for 25k and it only represents 1/52 of that condo the condo isnt worth 1.3 million so it's a similar interest rate to a payday loan, pawn shop, or credit card

 

[SNA27]

TS divided or undivided interest is a Real property by definition. I have deeds recorded in Nevada, Arizona, Hawaii, Florida, and Tennesse that say they are real property recorded with respective jurisdictions. Even CWA Trust has underlying deeds at various resorts.

Condos and Townhomes that are ubiquitous now are divided interests in a Real property and 30 years ago banks used to charge a slightly higher interest rate on those mortgages. TS is simply a time division of such condominiums, divided interests in Real Property whether they are fixed weeks or floating weeks. Then they came up with Points as currency to trade such Time Divisions in a more granular fashion so you could just book a few days instead of a whole week. Points are undivided interests in a Real Property just the same.

I don't buy the concept of the interest rate being dependent on supply and demand because if it were so, high demand California real estate should attract lower rates than some podunk in the boondocks. Home mortgage rates are pretty standard all over the USA. Automobiles, being a highly depreciating property, should command high interest rates. I think it has more to do with a lack of buyer awareness and a lack of prominent disclosure of rates upfront. There should be a big board announcing the rate like they do in the banks. So a buyer can really beware!

Methinks, even an addled brain on vacation would be rudely awakened to face reality at the mention of a 15% rate over 10 years!

 

[Crafty71]

Methinks, even an addled brain on vacation would be rudely awakened to face reality at the mention of a 15% rate over 10 years!

Unless that brain has already put the existing vacation on a C/C at 20%...that's not me and not you, but there are many others...

 

[ecwinch]

[Mod note: This tangential conversation about Interest Rates and why timeshares are not truly real estate was moved out of another thread "Need Advice".]

 

[SNA27]

@ecwinch,
While my questions arose from the predicament of 'Clueless in Creditville' needing advice, they do belong in a separate thread.
Mea Culpa!

 

[dagger1]

To answer your original question, there are no laws prohibiting TS companies from charging the 13-15% they normally charge. I don’t think rates like this are considered usurious. But they are very high, it’s hard to understand why people borrow money at these interest rates...

 

[SNA27]

I think it has to do with a protected market with a captive audience with very little competition or laws requiring/mandating availability of alternatives.
For example, in California, my Auto insurance AAA is mandated to advise me of my rights to get my damaged car repaired anywhere and not just at their approved facilities.
Car Dealers cannot force a customer to use their financing even temporarily for a month. That market is wide open to banks, credit unions and others to participate.

Look at the enviably low default rate of ~4% or less in this lucrative market. I bet a whole lot of lenders like Credit Unions would love to have a shot at these customers being fleeced by TS companies. It's like shooting fish in a barrel!

I guess open market regulations will bring these rates down but buyer awareness and resistance to usury is a must. Something wrong when people with excellent credit succumb to this usury on a loan secured by real property.

 

[HitchHiker71]

TS divided or undivided interest is a Real property by definition. I have deeds recorded in Nevada, Arizona, Hawaii, Florida, and Tennesse that say they are real property recorded with respective jurisdictions. Even CWA Trust has underlying deeds at various resorts.

Condos and Townhomes that are ubiquitous now are divided interests in a Real property and 30 years ago banks used to charge a slightly higher interest rate on those mortgages. TS is simply a time division of such condominiums, divided interests in Real Property whether they are fixed weeks or floating weeks. Then they came up with Points as currency to trade such Time Divisions in a more granular fashion so you could just book a few days instead of a whole week. Points are undivided interests in a Real Property just the same.

I don't buy the concept of the interest rate being dependent on supply and demand because if it were so, high demand California real estate should attract lower rates than some podunk in the boondocks. Home mortgage rates are pretty standard all over the USA. Automobiles, being a highly depreciating property, should command high interest rates. I think it has more to do with a lack of buyer awareness and a lack of prominent disclosure of rates upfront. There should be a big board announcing the rate like they do in the banks. So a buyer can really beware!

Methinks, even an addled brain on vacation would be rudely awakened to face reality at the mention of a 15% rate over 10 years!

Deeded interest vs Undivided Interest are not legally the same:

Deeded

The most common timeshare ownership structure, a deeded vacation ownership interest conveys all the rights assigned to a traditional parcel of real estate. Legal title is granted in perpetuity and recorded with a land court, and owners retain a shared interest in their unit and all applicable common areas.

Undivided Interest

Legally defined as the “title to real property held by two or more persons without specifying the interests of each party,” undivided interests are most common with points-based timeshare programs. Under this system, you own a percentage of a given resort, or group of resorts, that affords you a certain degree of reservation privileges.

Deeded ownerships really apply to the older week based deeded ownerships where you're literally entitled to use a specific unit on a specific week in perpetuity. I own two deeded weeks that I use for PIC for example - week 37 at Colonies at Williamsburg and week 42 at Outer Banks Beach Club I. These are true deeded ownership timeshares.

I also own two CWA contracts, that aren't either of the above, CWA is what is called a Club Membership. I also own a UDI contract at NH - which many tend to term a deeded ownership, but it's really not a deeded ownership per above. Legalities vary by state, but many states tend to treat deeded ownerships and certain UDI contracts in similar manners. Either way, that doesn't mean it's a secured lien against collateral. There is no lien against the Wyndham owned resort property when you purchase a timeshare interest (technically called a fractional interest) - whether deeded or UDI - in other words your loan is not secured against any real collateral asset(s) that any bank who would loan you money can then repossess and sell if you stop paying on the loan - as someone else said - you're basically financing pre-paid vacations over time - the basic concept being that the present value of future vacations paid for now - is a better deal than paying for those same vacations at whatever costs are involved in future years. Since the bank has no ability to sell the asset in question to recover their costs - they charge much higher interest rates than for a similar mortgage loan against a secured real estate asset that the bank can foreclose on and sell at market value to recover their investment if you stop paying over the long term. Therefore, all timeshares are unsecured loans and do not fall under the same legal guidelines that mortgage loans fall under legally. There is not any direct lending market for timeshares as a result.

Lenders won’t mortgage a time share

“There is no direct lending market for timeshare buyers,” ARDA said in a letter to the Consumer Financial Protection Bureau (CFPB) in 2012 when the bureau was drafting new mortgage-lending rules.

Lenders won’t mortgage a time share because they haven’t been successful in resales or in their valuation, says Patricia Hayhurst, mortgage consultant for Capital Bank in Coral Gables, Florida. “They are considered high-risk lending.”

Personal loans can be made, but borrowers may go through the same vetting process — tax returns, credit scoring and income verification — as they would for a mortgage. But because personal loans are unsecured, the timeshare won’t be used as collateral, Hayhurst says.

Nelson says LightStream considers what a borrower will use the loan for but, like most personal loans, a greater emphasis is placed on good credit and an ability to show that you can save money. If borrowers can show that, “we’ll give them $20,000, regardless of whether it’s for a horse, to adopt a child or buy a timeshare,” he says.

The loan also will cost less than a developer’s loan. According to LightStream’s website, a loan for $10,000 to $24,999 carries an interest rate of 6.24% to 13.64% for terms ranging from 24 to 72 months.

 

[sjsharkie]

So, are there any laws preventing TS companies like Wyndham from charging such usurious rates of 15% even for customers with best credit? Aren't there usury laws in every state?

To answer the OP's original question, usury laws in each state vary, but they are often complex and have exceptions. Some like Virginia have exceptions for mortgages secured by real property, most are trumped by federal law where banks that are chartered in usury friendly states (why do you think most of your bills go to Delaware and South Dakota?) don't have to comply with state law ... and we know the big timeshare companies have already ensured that they are in compliance with the law in these states.

Deeded timeshare property is still real property. It's just that the underlying property usually isn't worth the loan attached to it -- which is why only the developer will generally provide a loan secured by a lien on the property. They are the only ones who want it back in case of default because they can keep whatever down and subsequent payments were made, and turnaround and resell it. As other have noted, the only other option for loans is usually a personal unsecured loan... in which case the bank is lending based on your credit history and has no interest in securing it with the underlying property.

I'd imagine that most of these timeshare companies have a separate lending arm that is chartered elsewhere. So while you are buying from Wyndham, you are probably financing from Wyndham Financial Company (hypothetical name -- I made it up) chartered in a friendly state or some other affiliated lending arm that has already ensured they are in compliance with federal and state laws.

-ryan

 

[Jan M.]

To answer the OP's original question, usury laws in each state vary, but they are often complex and have exceptions. Some like Virginia have exceptions for mortgages secured by real property, most are trumped by federal law where banks that are chartered in usury friendly states (why do you think most of your bills go to Delaware and South Dakota?) don't have to comply with state law ... and we know the big timeshare companies have already ensured that they are in compliance with the law in these states.

Deeded timeshare property is still real property. It's just that the underlying property usually isn't worth the loan attached to it -- which is why only the developer will generally provide a loan secured by a lien on the property. They are the only ones who want it back in case of default because they can keep whatever down and subsequent payments were made, and turnaround and resell it. As other have noted, the only other option for loans is usually a personal unsecured loan... in which case the bank is lending based on your credit history and has no interest in securing it with the underlying property.

I'd imagine that most of these timeshare companies have a separate lending arm that is chartered elsewhere. So while you are buying from Wyndham, you are probably financing from Wyndham Financial Company (hypothetical name -- I made it up) chartered in a friendly state or some other affiliated lending arm that has already ensured they are in compliance with federal and state laws.

-ryan

It would be very interesting to know which, if any, of the resorts are on property owned by Wyndham. I thought there were some that the actual property is owned by Fairfield/Wyndham. Are there any that are owned by the resort/association? Not that knowing serves any purpose other than to satisfy curiosity.

 

[SNA27]

Legislation is the answer to bring all these bustards flying under the radar to heel!

Wyndham TS Mortgage default is less than 4%. So, if the risk is 4% or less, how can a 15% best customer rate be justified under any metric when I am getting close to 0% on my savings at an FDIC bank!

This is a protected market like a loanshark infested payday loan dystopia that is askew and is in dire need of a good butt-kick from enlightened citizens who know the score! Just saying!

 

[sjsharkie]

Legislation is the answer to bring all these bustards flying under the radar to heel!

Wyndham TS Mortgage default is less than 4%. So, if the risk is 4% or less, how can a 15% best customer rate be justified under any metric when I am getting close to 0% on my savings at an FDIC bank!

This is a protected market like a loanshark infested payday loan dystopia that is askew and is in dire need of a good butt-kick from enlightened citizens who know the score! Just saying!

Where are you getting the 4% -- are you getting the 4% from the graph you posted? I don't read it as that -- it says ~4% ANNUAL CHURN including elevated loan defaults. That means their gained approx. 4% customers including (new ones subtracted from those that left Wyndham) divided by their total customer count; it doesn't mean that mortgage default is less than 4%... at least that's how I read it.

I'd wager their default rate is more than 4%. I'd wager their credit rules are lax -- they'll probably loan to any credit rating but offset the lower ones with a higher down payment AND high interest rate.

 

[SNA27]

Deeded interest vs Undivided Interest are not legally the same:


Deeded ownerships really apply to the older week based deeded ownerships where you're literally entitled to use a specific unit on a specific week in perpetuity. I own two deeded weeks that I use for PIC for example - week 37 at Colonies at Williamsburg and week 42 at Outer Banks Beach Club I. These are true deeded ownership timeshares.

I also own two CWA contracts, that aren't either of the above, CWA is what is called a Club Membership. I also own a UDI contract at NH - which many tend to term a deeded ownership, but it's really not a deeded ownership per above. Legalities vary by state, but many states tend to treat deeded ownerships and certain UDI contracts in similar manners. Either way, that doesn't mean it's a secured lien though. There is no lien against the Wyndham owned resort property when you purchase a timeshare interest (technically called a fractional interest) - whether deeded or UDI - in other words your loan is not secured against any real asset(s) that any bank who would loan you money can then repossess and sell if you stop paying on the loan - as someone else said - you're basically financing pre-paid vacations over time - the basic concept being that the present value of future vacations paid for now - is a better deal than paying for those same vacations at whatever costs are involved in future years. Since the bank has no ability to sell the asset in question to recover their costs - they charge much higher interest rates than for a similar mortgage loan against a secured real estate asset that the bank can foreclose on and sell at market value to recover their investment if you stop paying over the long term. Therefore, all timeshares are unsecured loans and do not fall under the same legal guidelines that mortgage loans fall under legally. There is not any direct lending market for timeshares as a result.

Lenders who are forced to take mortgages in Podunk in the Boondocks can also be forced to take TS mortgages under the same rules. 4% default rate is less risky and 15% usury rates are not even justified based on risk! Just my 2 cents!

 

[SNA27]

Where are you getting the 4% -- are you getting the 4% from the graph you posted? I don't read it as that -- it says ~4% ANNUAL CHURN including elevated loan defaults. That means their gained approx. 4% customers including (new ones subtracted from those that left Wyndham) divided by their total customer count; it doesn't mean that mortgage default is less than 4%... at least that's how I read it.

I'd wager their default rate is more than 4%. I'd wager their credit rules are lax -- they'll probably loan to any credit rating but offset the lower ones with a higher down payment AND high interest rate.

So, what do you think is the default rate? How does it compare to Home Mortgage default rate? Isn't the interest rate supposed to be commensurate with risk in a free market?

 

[SNA27]

I interpreted the churn to include people turning in their holdings to Ovation as well as people who defaulted and therefore the default being < 4%. Please correct me if I am wrong.

I would love to understand your previous post. It packs a lot of stuff which leaves me clueless. I wish you would elaborate. I do think the Investor powerpoints lie a lot or cast a favorable spin on adverse results!

churn rate
NOUN

1. the annual percentage rate at which customers stop subscribing to a service or employees leave a job.
   "the churn rate for cable is much higher than that for satellite services" ·

 

[sjsharkie]

So, what do you think is the default rate? How does it compare to Home Mortgage default rate? Isn't the interest rate supposed to be commensurate with risk in a free market?

I don't know -- it really would depend on a lot of factors. Truth be told, maybe it is close to 4% but as I said, I'd wager (more likely than not) that it is higher than 4% if they take a deposit.

You can't compare it to the home mortgage default rate. The average home loan process is so much stringent -- it has you fill out a huge form, then verifies your income, then looks at your credit report details for liabilities and credit score, then feeds it through a computer calculation, then it goes through an underwriter for review, then you appraise the house value secured by the loan... yada yada yada. There is good reason why that loan rate can be at 4% and the bank/investor still makes a good ROI.

I'd liken a timeshare purchase to be more like a credit card purchase. And you see what their interest rates are... it is a much closer risk profile to an APR on your revolving credit IMHO.

 

[sjsharkie]

I interpreted the churn to include people turning in their holdings to Ovation as well as people who defaulted and therefore the default being < 4%. Please correct me if I am wrong.

I would love to understand your previous post. It packs a lot of stuff which leaves me clueless. I hope you could elaborate. I do think the Investor powerpoints lie a lot or cast a favorable spin on adverse results!

Nope, not as I understand it. The tilde in front means approximate -- it does not mean a negative number. And 4% is the customer churn -- the amount of net customers gained or lost divided by their total customer base.

Plus it is a positive 4% -- that is good meaning that Wyndham increased their net customers by 4% year over year. This graph only shows good news that it is highlighting to shareholders... I chuckle at >98% retention of owners without a loan balance. This tells me that this metric would have dropped signficantly if they included owners who defaulted on their loan -- which likely means that the % of owners who defaulted was likely pretty high as it would pull their retention rate down.

 

[SNA27]

Omg! I get it! They are representing the churn rate of the whole population and not the 184000 owners who have mortgaged. The default rate should be measured wrt to mortgagors and not against the whole population most of whom have no mortgage! If I were an investor, I would be pissed!

Thank you for indulging my curiosity!

 

[HitchHiker71]

Lenders who are forced to take mortgages in Podunk in the Boondocks can also be forced to take TS mortgages under the same rules. 4% default rate is less risky and 15% usury rates are not even justified based on risk! Just my 2 cents!

Since when is any lender forced to issue mortgages? If you are referring to community reinvestment banking statutes - these only apply to local banks that open branches within the communities, and these banks run complex risk analyses before doing so. The larger conglomerate banks such as JPMC, BOA, CapOne, etc., as well as the internet banks that have no brick and mortar - don’t have to abide by community reinvestment statutes.

It’s also worth mentioning that 90% of all mortgage paper is sold after the loan is initially processed to either Fannie Mae or Freddie Mac - so the banks aren’t really taking much lending risk when they are selling the paper 90% of the time. In other words - they are transferring all of the loan risk to the two entities still in receivership by our government. Your tax dollars at work. Since there is and never will be any secondary paper market for timeshare loans - this fact significantly alters the risks involved.


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[HitchHiker71]

I don't know -- it really would depend on a lot of factors. Truth be told, maybe it is close to 4% but as I said, I'd wager (more likely than not) that it is higher than 4% if they take a deposit.

You can't compare it to the home mortgage default rate. The average home loan process is so much stringent -- it has you fill out a huge form, then verifies your income, then looks at your credit report details for liabilities and credit score, then feeds it through a computer calculation, then it goes through an underwriter for review, then you appraise the house value secured by the loan... yada yada yada. There is good reason why that loan rate can be at 4% and the bank/investor still makes a good ROI.

I'd liken a timeshare purchase to be more like a credit card purchase. And you see what their interest rates are... it is a much closer risk profile to an APR on your revolving credit IMHO.

Here’s the audited financials from 2018 shared during the annual owners meeting, note the Bad Debt item:

So roughly 6.8MM out of 155M or about 4.4% bad debt expense.


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