I’m proud to have had the following article published in the American Resort Developer’s Magazine this month - page 44 & 67:
ARDA Developments Magazine 2008
Is Vacation Ownership Immune from the Credit Crisis Cold?
Will Rogers once quipped “I am not so much concerned with the return ON capital as I am with the return OF capital.” As lenders awake from a period of historically low risk at all levels of consumer finance, Mr. Rogers is once again a sage.
In contrast, I paraphrase another Mr. Rogers (Fred) “it’s a beautiful day in our neighborhood” of travel, timeshare and hospitality. Americans love their vacations and somehow, the massive destruction of mortgage and credit markets has yet to have little impact on our industry. Certainly, less impact than analysts predicted last summer when the mortgage crisis broke. Conventional wisdom says if consumers are loosing their homes in record numbers, wouldn’t they default on their timeshare loans first? The correlation has not yet become apparent.
Default rates across a spectrum of consumer credit has risen, spreads are up, and allowances for loan losses are being increased by lenders in every asset class from mortgages to autos to student loan debt. Lenders are bracing for bad news in the timeshare industry as well, but the numbers do not yet reflect the storm that is elsewhere.
By comparison, the assumption home mortgage lenders made was that the family home was sacrosanct, the last loan not to be paid on time. Today’s credit markets are telling a different story. Consumers looked at their home as an investment, when the investment value wanes, the motivation to continue to make uncomfortable payments follows. The timeshare industry has done a solid job of down playing the investment value of the timeshare purchase, it’s lifestyle – vacation ownership, and maybe this is key to the resistance to give up the ship when a financial storm hits the family budget?
No matter how much liquidity The Fed injects, interest rates to consumers continue rising because rates are a reflection of risk assumptions of the return of investment. Consumer rates on timeshare are often twice that of a home loan, a further up tick would have little impact on the monthly payment to the buyer. If the risk of timeshare default been fully vetted and accounted for by lenders already, this may also explain the lack of crisis in timeshare portfolios.
Primary home mortgages were underwritten assuming less than a 1.0% default rate. Historically, this assumption could be justified, even if optimistic, if investors were only buying simple primary home mortgages. CMO (collateralized mortgage obligations) became more complex in the last couple years as the wizards sliced and diced the risk. Zero down, sub prime and exotic loans were being traunched into securities that hid the true risks to investors, we are witnessing a slow deflation of excess and a re-measuring of risks in these loans. Over 100 mortgage lenders have failed or exited in the last year, an unprecedented exodus.
Credit risks in timeshare are simpler due to the homogeneousness of the note collateral. We’re yet to see an ‘exotic’ timeshare loan product, but had the credit orgy continued we may have seen a NIJA (no income, no job), 40-year, interest-only, option ARM timeshare loan birthed. Underwriting of the developer and developments that often stand as security behind timeshare consumer receivables offer a layer of credit protection than doesn’t exist in most other consumer lending. Universities don’t stand behind the credit quality of their students; nor guarantee their ability to get a job to service the debt incurred in the purchase of a degree.
Feel Good Lending
Timeshare has never felt euphoric as a bastion of safety and security. Again in contrast, negative amortized home mortgage payments felt good to borrowers, and lenders progressively justified the risk with increasingly more complex derivative risk swaps. The loans were collateralized by rock solid USA real estate, even if the borrower put zero down. It all felt so good. Euphoria set in. Excesses happened. Risk was ignored.
A loan to a consumer for the purchase of a ‘vacation’ just feels more risky. Deed or no deed, timeshare is but a fraction of collateral, and an abundance of IOU. The risk never got hidden from investors it has been measured and accounted for in yield.
It’s the Demography, Stupid
The 199_ campaign slogan was “It’s the Economy Stupid”; this year politicians should consider demographics effect on our economy. Forty years after The Summer of Love, one key strength of vacation ownership may be simple demographics. 78.2 million boomers in their 50s, living out the freedom of travel. Timeshare represents an affordable way to fulfill their dreams. Vacation property markets are weathering the real estate storm better than suburban America, and most boomers simply can’t afford whole ownership where they want to spend their time.
Could this be a sign of the first stages of the great migration? Boomers will not settle for the retirement trailer communities of their parents, they want ‘better nests’, what I call ‘Besting’. They seek lifestyle, but will need to reinvent the idea of retirement housing to afford it. The relative affordability of timeshare plays an important role in its performance relative to other asset classes. For many, timeshare is part of their retirement planning, a substitution for that cabin on Golden Pond.
The Substitution Effect
Economists claim that as consumers tighten their belts, they make ‘value’ trade offs, called substitutions. I think of this as trading high cost Ham for lower cost Spam. In economic terms, Spam is a sign of Recession; generic spam in shopping carts precedes a depression. (No manufacturer is gearing up production of generic spam, a positive sign.)
The timeshare industry was born in tight financial times, it is an alternative to whole ownership, and has evolved in many ways to offer more value than more costly vacation options, a value. As long as a consumer sees a value, he will buy it and make payments to own it.
Evolution
Just as lenders have discovered ‘Risk’, graying boomers are growing to appreciate ‘Value’ (think ‘the early bird special’). The timeshare industry avoids catching the credit cold by helping lenders proactively mitigate risks; and continuing to deliver significant value to its consumer.
Bob Waun
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