The Timeshare Industry needs its own GMAC

[BocaBum99]

At first, I was against the idea of creating a finance company for timeshares ala GMAC for the auto industry. However, after I thought about it more, I think it makes good sense.

As we know, timeshare developers rely on the sale of the loans they make on timeshare purchases on the secondary market. They need to sell those loans so that they can build new resorts and finance new customers. However, the big issue with timeshare loans is that they go under water right after the rescission period.

One way to stop the practice of timeshare developers selling product for 2-4 timeshare its value and more is to make stringent financing requirements like most resort developers are instituting now. But, the current situation threats the very existence of the industry going forward. Rather than choking it off by lack of fianance, another option is to create a type of GMAC for the timesharing industry. Let's call it TSAC.

What TSAC would do is register as a bank so that it could receive TARP funds. And, it can raise capital via a public offering of debt and stock in the future. What would be different in the TSAC is that the underlying timeshare properties that it finances would need to have guaranteed buyback options from the developers at 50% of the loan value. This would serve to put some accountability on the resort developer to ensure resale values of their timeshare resorts do not plummet below the 50% of loan value. If the resort developer requires 20% down payment on a credit card or personal check at closing, this would mean that the resale value of a timeshare must be maintained at a level higher than 40% of the retail price. That is still a steep decrease in value. But, at least it will be maintained at that level and it will put limits as to what the resort developer will do to maintenance fees.

This is not a perfect solution, but it may do well to serve the timeshare industry while at the same time prevent resort developers from dramatically devaluing ownerships. That would be a nice change and counterbalance to what exists today.

 

[dioxide45]

You need to have a company willing to jump in to something where the LTV won't be 100% for at least five or six years. They are taking a huge risk since many people will default on these loans before their mortgage or car payments.

The problem with financing a TS is that when doing so you are buying something that you can't afford. I was surprised at my first presentation to learn that a TS loan is for 10 years. If I buy a car (in some cases costs more than the TS) the longest a loan can go for is 5 years, maybe 6 max. The TS loan had very small payments but was stretched out so long that the TS would cost double if not more after those 10 years. Financing TS is a bad idea, though financing for 10 years is horrible.

I think with the market forcing developers to look for cash buyers it will force their prices down, as many people will not outlay that much money upfront. Also by forcing cash purchases it will drive down demand which should force prices down also.

As a country we don't need people financing luxury purchases. Haven't we learned already with people buying larger extravagant homes they can’t afford?

 

[BocaBum99]

I agree that timeshares should not be financed. I also do not like the resort developers sales and marketing model. I am only recommending an approach where the industry can save itself.

I am not sure I agree that people who finance timeshares can't afford them. Certainly, many of them cannot afford it. But, others can. If timeshare loans are not profitable, then they will fail outright. However, I believe that many timeshare loans are profitable, just like unsecured credit cards. As long as the owner pays the loan for 3-4 years on average, the resort developer probably makes money on it.

 

[dioxide45]

Something else to consider is that companies originating loans don't hold those loans. They sell them on the secondary market and re-lend the money they get from the sales. This goes for GMAC and resort developers. A company would have to have a lot of capital, as they would be hard pressed in today's market to find investors for the paper. They would only be able to grow so much before running out of money. Banks are able to lend money because they have deposits to lend out. GMAC isn't registered as a bank (though wanting to but unable to so far).

TARP funds will only be available until the $700 billion runs out. Once that is gone the TARP program won't be any help. I don't think the government would support an initiative that would be looking for TARP funds before it even opens its doors.

 

[BocaBum99]

Again, I don't like financing timeshares and I don't like the resort developers sales and marketing model. If the current situation creates industry reform, I'll all for that as the FIRST option.

That said, the TSAC idea is just an interesting thought process of what may be possible.

The timeshare industry can buy a bank. And, they can capitalize it themselves. Today, large public companies like Marriott can raise capital by selling stock and bonds. If there is a guaranteed buyback option at 50% of the loan by all participating timeshare, this would be FAR better than what exists today when timeshare resort developers package up and sell their loans.

What I am also saying is that this TSAC can sell it's own stock as well to raise capital. If the loans are indeed profitable (which I don't know for sure), then this may not be a bad option. At a minimum, ARDA could help investigate the options.

 

[dioxide45]

Again, I don't like financing timeshares and I don't like the resort developers sales and marketing model. If the current situation creates industry reform, I'll all for that as the FIRST option.

That said, the TSAC idea is just an interesting thought process of what may be possible.

The timeshare industry can buy a bank. And, they can capitalize it themselves. Today, large public companies like Marriott can raise capital by selling stock and bonds. If there is a guaranteed buyback option at 50% of the loan by all participating timeshare, this would be FAR better than what exists today when timeshare resort developers package up and sell their loans.

What I am also saying is that this TSAC can sell it's own stock as well to raise capital. If the loans are indeed profitable (which I don't know for sure), then this may not be a bad option. At a minimum, ARDA could help investigate the options.

In order to raise the capital by selling stock they would have to seriously dilute their current shareholder base. I don't see how any entity could back this with their own capital, they need Wall Street and the power of hundreds of thousands of investors to back the paper, and I don't think Wall Street or those investor are ready to do that yet.

The developers are in this mess right now because they are holding a lot of paper that they cannot sell, thus they don't have the capital to build new resorts. If they could simply just sell more stock they would have done that. Selling additional stock usually requires the support and backing of their largest institutional investors (the big Mutual Fund companies and pension funds). If it were that easy to raise money, the banks would be doing it too. It isn't happening, the money is not there.

I don't doubt that it could work, just not now. Maybe in 3-5 years and that would be pushing it.

 

[BocaBum99]

In order to raise the capital by selling stock they would have to seriously dilute their current shareholder base. I don't see how any entity could back this with their own capital, they need Wall Street and the power of hundreds of thousands of investors to back the paper, and I don't think Wall Street or those investor are ready to do that yet.

The developers are in this mess right now because they are holding a lot of paper that they cannot sell, thus they don't have the capital to build new resorts. If they could simply just sell more stock they would have done that. Selling additional stock usually requires the support and backing of their largest institutional investors (the big Mutual Fund companies and pension funds). If it were that easy to raise money, the banks would be doing it too. It isn't happening, the money is not there.

I don't doubt that it could work, just not now. Maybe in 3-5 years and that would be pushing it.

I agree that the time is not ideal to create it now. The only chance for it to be ideal is if it is in an entity that has government backing today, therefore TARP and therefore a bank. I also fully understand what it means to dilute stock. It's fine to dilute stock as long as the economic value add (EVA) is significantly higher than the cost of capital. I laid out the circumstances where it "might" be true. Not sure if the economics of timeshare loans will pay off, but it should be evaluated. That is the unknown to me and could be a deal breaker. The new requirement of the resort developers guaranteeing a short sale price as part of the deal. This could significantly improve the performance of the loans. In addition, the primary stockholders in the financing entity would be the resort developers. I specifically made the analogy to GMAC for a reason. GMAC's primary role right now will be to finance auto purchases. If it can be done for autos, it *may* be able to be done for timeshares. The biggest issue with timeshares is that LTV will be over 100 which means the loans are very high risk. But then again, the interest rates are very high as well.

 

[timeos2]

Not bad but it would take a comitment to something beyond today. Not likely

I agree that the time is not ideal to create it now. The only chance for it to be ideal is if it is in an entity that has government backing today, therefore TARP and therefore a bank. I also fully understand what it means to dilute stock. It's fine to dilute stock as long as the economic value add (EVA) is significantly higher than the cost of capital. I laid out the circumstances where it "might" be true. Not sure if the economics of timeshare loans will pay off, but it should be evaluated. That is the unknown to me and could be a deal breaker. The new requirement of the resort developers guaranteeing a short sale price as part of the deal. This could significantly improve the performance of the loans. In addition, the primary stockholders in the financing entity would be the resort developers. I specifically made the analogy to GMAC for a reason. GMAC's primary role right now will be to finance auto purchases. If it can be done for autos, it *may* be able to be done for timeshares. The biggest issue with timeshares is that LTV will be over 100 which means the loans are very high risk. But then again, the interest rates are very high as well.

I don't know of a Developer with enough foresight to actually think things through to the degree a plan like this would require. And how would they ensure the 40% value? Buy backs? How could they guarantee they'd have the cash needed to do that? Innovative but unlikely to fly. Lets just fix the current sales model to lower prices to realistic levels, give the Developers enough profit to build more and change the sales approach. When we see Civics and Malibu's in the sales parking lots rather than Audi's, Caddilac's and Lexus' we'll know the proper change has happened. Whew! That alone is a pipe dream I fear.

 

[AwayWeGo]

At Least The Old Heap Is Paid For.

When we see Civics and Malibu's in the sales parking lots rather than Audi's, Caddilac's and Lexus' we'll know the proper change has happened.

Most times when we've checked in to a timeshare -- ours or other people's (on exchange) -- we've rolled in via Plymouth or Dodge.

The sole exception was January 2008 when we motored in via Lincoln Town Car -- borrowed from The Chief Of Staff's sister.

Next month, we'll be tooling in via a semi-upscale version of our old Plymouths & Dodges -- a 2006 Chrysler Town & Country.

That's what passes for fancy wheels around here.

But don't laugh. It's paid for.

Full Disclosure: There were also a few times when we drove Chevies & Fords to timeshares. But those were rentals, so they (almost) don't count. Plus, they were just Chevies & Fords.

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​

 

[BocaBum99]

I don't know of a Developer with enough foresight to actually think things through to the degree a plan like this would require. And how would they ensure the 40% value? Buy backs? How could they guarantee they'd have the cash needed to do that? Innovative but unlikely to fly. Lets just fix the current sales model to lower prices to realistic levels, give the Developers enough profit to build more and change the sales approach. When we see Civics and Malibu's in the sales parking lots rather than Audi's, Caddilac's and Lexus' we'll know the proper change has happened. Whew! That alone is a pipe dream I fear.

All Wyndham has to do is offer such repos at 60% of developer prices and allow them to come with VIP benefits. Tuggers alone would probably buy them all up even knowing that Wyndham actively devalues ownerships. However, with such a buyback clause in the financing, Wyndham would have to strike a balance between policies that help their rental and sales sites and policies that lose them money on repos.

Having an independent board for the Vacation Clubs is completely unrealistic. The resort developers would rather fight to the bitter end in lawsuits before allowing that to happen. So, the best alternative is to create an incentive and penalties when owners equity gets devalued. This will do more to keep the developer in check than any board of directors can do.

 

[ecwinch]

The problem is that true Loan To Value (LTV) is somewhere around 10-20%, unless the buyer is putting 80% down. The value of the underlying asset is completely disconnected to the price of the loan.

That is what is so crazy about the fact that timeshare industry actually was using CDO's to provide finance funds. As noted earlier, people will walk on their timeshare loan at a significantly faster rate then they would over their auto or home.

What type of fool thought that timeshare backed CDO's were safe investments. It is amazing that they found a market for these things in the first place. The default rate is thru the roof even in the best of economic times.

 

[dioxide45]

What type of fool thought that timeshare backed CDO's were safe investments. It is amazing that they found a market for these things in the first place. The default rate is thru the roof even in the best of economic times.

I don't think anyone thought they were safe investments; otherwise they wouldn't be pulling 14-20% rates. The shakier the investment the higher the rate. These loans would have been packaged and pooled just like home mortgages to help mitigate the risks involved if just a few of those loans soured.

 

[Anthony Burdge]

At first, I was against the idea of creating a finance company for timeshares ala GMAC for the auto industry. However, after I thought about it more, I think it makes good sense.

As we know, timeshare developers rely on the sale of the loans they make on timeshare purchases on the secondary market. They need to sell those loans so that they can build new resorts and finance new customers. However, the big issue with timeshare loans is that they go under water right after the rescission period.

One way to stop the practice of timeshare developers selling product for 2-4 timeshare its value and more is to make stringent financing requirements like most resort developers are instituting now. But, the current situation threats the very existence of the industry going forward. Rather than choking it off by lack of fianance, another option is to create a type of GMAC for the timesharing industry. Let's call it TSAC.

What TSAC would do is register as a bank so that it could receive TARP funds. And, it can raise capital via a public offering of debt and stock in the future. What would be different in the TSAC is that the underlying timeshare properties that it finances would need to have guaranteed buyback options from the developers at 50% of the loan value. This would serve to put some accountability on the resort developer to ensure resale values of their timeshare resorts do not plummet below the 50% of loan value. If the resort developer requires 20% down payment on a credit card or personal check at closing, this would mean that the resale value of a timeshare must be maintained at a level higher than 40% of the retail price. That is still a steep decrease in value. But, at least it will be maintained at that level and it will put limits as to what the resort developer will do to maintenance fees.

This is not a perfect solution, but it may do well to serve the timeshare industry while at the same time prevent resort developers from dramatically devaluing ownerships. That would be a nice change and counterbalance to what exists today.

I agree with your thoughts on creating a finance company for the timeshare industry, similar to GMAC for the auto industry The idea of TSAC with its guaranteed buyback options and strict financing requirements makes a lot of sense. This will put accountability on the resort developers and maintain the resale values of timeshare properties, providing a much-needed balance to the current situation. It's not a perfect solution, but it could be a good start to help the timeshare industry sustain itself.

 

[TUGBrian]

thanks for the quality post of a dead thread!

we also automatically removed the link you inserted into a period into this post, no doubt this was done in error as noone would legitimately create a fake backlink like that!