midweek

The Mid Week Slot: Another New Name along with an Article by Michael Kosor

During our usual morning search of various websites and forums, we came across this from Mindtimeshare, it is our old friends Litigious Abogados with a new name to add to their ever increasing family.

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Amador Galeca is the new name to look out for, the address is one that has been used before with one of their other incarnations:

Calle de V. Sanz, N14, 16, 38002, Santa Cruz De Tenerife

With the freephone number: 0800 802 1223

Email: galeca_ukclaims@consultant.com

Website: http://amadorgaleca.com/

They also have some new names, which are variations of those that have been used before, and what looks like a few new faces in the photographs of the “lawyers”.

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Amador Malodan Galeca

Once again it is going to be the same old story, we are taking your timeshare company to court, it is scheduled for trial within the next few weeks, pay ex-amount and be part of it. Then suddenly you are told you won, as the director, (we’ll bet it is Keith Baker or Keith Balker again) has pleaded guilty.

We will be publishing a fuller post on this when we have done a little more research.

On the subject of legal action against timeshare companies, those lawyers at Canarian Legal Alliance have once again got another result from the Supreme Court. That now makes 58!!

This one from reports is against Silverpoint, with the court declaring the contract null and void with the return of over £63,000 plus legal interest and legal fees. They also had another win against Silverpoint at the Court of First Instance in Tenerife. Again the contract was declared null and void and the return of over £59,000.

So now on with the article which was supposed to have been published in last Friday’s Letter from America.

Timeshare and Asset-Backed Security Products

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By Michael Kosor

September 20, 2017

There has been an increase in defaults for some timeshare companies concerning timeshare loans packaged in their Asset-Backed Securities (ABS) products. The average consumer will recall the devastation its sister security, the Mortgage-Backed Securities (MBS), created that triggered financial collapse. Consumers and regulators should pay attention to the timeshare product today so similar to the products of 2007 that led to financial devastation.

I believe this is clearly and directly related to the increase in litigation by these particular developers, targeting consumer advocates and the legal community. While there definitely are attorneys practicing questionable business practices, “Kill all the lawyers” is not the answer. Every citizen has a right to legal representation if they feel they have purchased a product sold by deceit.

Developers are rightly hypersensitive to any bad press that points to increases in loan defaults as they are sure to negatively impact ABS rating/pricing. The ABS product and the associated market are by nature complicated, not part of our public market system, so limited to sophisticated players. As such, it is not a part of mainstream news. To that end, watch a very short video published by Allison Bisbey, Editorial Director, Capital Markets Newsletter.  

https://asreport.americanbanker.com/video/diamond-resorts-abs-under-pressure-from-companys-sales-tactics

Some developers are experiencing an elevated level of defaults. In the case of Diamond Resorts, it has reached a point the rating agency for DRI, KBRA (Kroll Bond Rating Agency) recently saw fit to issue a note on the issue, albeit not surprisingly, a reaffirmation of KBRA’s original rating.

https://www.krollbondratings.com/announcements/3705

A timeshare ABS is a security whose income payments, and hence value, is derived from and collateralized or “backed” by a pool of underlying assets. Contrary to popular opinion, “hard” assets do not serve as the primary collateral – only the contractual obligation to pay. However, hard assets do provide secondary security and impact overall price/return.  

Today, the vast majority of timeshare loans are not backed by any real property interest. Timeshare ABSs sold today are little more than securitized consumer loans. Yet when I talked to the Moody analysts just a couple weeks ago about their most recent Wyndham ABS rating, they stated they use criteria established in 2003 – when a timeshare loan was typically still attached to a real estate interest.

In rating an ABS, comparisons with historical loan default rates are critical. Timeshare ABSs, notably a different underlying product than the one packaged today, report very limited/zero defaults.  This is not because the consumer default rate is or was low – to the contrary. Rather, DRI (not unlike Wyndham) uses ABS structure options allowing them to repurchase or substitute all of its defaulted loans. As a result, the ABS reports defaults as 0% while actual consumer defaults are much higher. (Note a 6% – 8% default rate for “aged” loans is informally used, if any pre-option rate is reported or available at all). Aged loans have a proven repayment history of 6 months or more. The “aged” number does not include what is certainly a much higher total consumer default percentage of timeshare loans when early defaults are included.  

The repurchase and substitution option in an ABS is typically capped at around 15% of the total. More importantly, the rating agency should not (but appear to nonetheless) give credit to the option to repurchase or substitute defaulted loans. Gross loss expectations are increasing also. It is reported in the investor literature as 11 – 12% in prior years to 13-14% today; dangerously close to underwriting limits.  

Wyndham and DRI would like its debt investors to believe the increase in defaults is due to an uncharacteristically high number of borrowers being solicited by lawyers and “scammers” offering to get consumers out of their timeshare. Thus, we see the rise in Cease and Desist letters and litigation targeting consumer “friendly” legal providers.

What is more, ABS investors, thus the developers selling timeshare ABSs, are hypersensitive to cash flow. Admittedly a bit desensitized since 2007, they will nonetheless respond when issues or news challenge a specific ABS or a class of ABS, such as timeshares.

Timeshare regulators (assuming any exist and/or pay attention) also need to be reminded that in 2007 investors experienced losses because they made decisions on bogus ratings, guarantees from mono-line insurers, and a blind faith in historically real-estate prices.  Simplistically, people ignored the quality of the contractual cash flow, relying instead on history (home price appreciation in the case of the MBS). This sounds analogous to timeshares today.  

With the rise in Social Media, timeshare members are more and more expressing increased owner unrest, disturbed by a rise in consumer complaints, as evidenced by Mark Brnovich’s issuance of Diamond’s Assurance of Discontinuance AOD fueled by over 900 consumer complaints. Is anyone paying attention?

I spoke to a Wyndham executive last month at my VOAs annual meeting. He saw this issue as a problem caused by lawyers seeking timeshare members and a major problem. With an aging population of original buyers who no longer want or need their timeshare, many don’t know where to turn when there is no secondary market and the contract is perpetual.

On a similar line, most all ABS, to include timeshares, are supported by significant “credit enhancements” to protect the investors from higher than anticipated (historical) default rates. Overcollateralization (issuing less debt than total assets held) is a particularly valued credit enhancement technique used. However, overcollateralization becomes tricky, even suspect, when the assets held by the seller have no explicit face amount/market established price as with the non-viable timeshares resale market. My impression is most agency raters, while sophisticated financial types, are not educated on the underlying change of the timeshare product pool being securitized, as most are reliant on the developers for their information and understanding.

Finally, as I noted earlier, reported default rates are zero. As a result, most rating agencies, I argue to retain clients, and many investors, dependent on industry reporting, do not dig any deeper. Both sides see no news as good news – once again analogous to the 2007 mortgage back securities fiasco. This needs to change.

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Thank you Michael, not being of a financial mind, the article has been a bit of an education, I just didn’t know these things went on.

There we have it, look out for the article on Amador Galeca, more important beware of any calls or emails promising that you have money waiting for you. The truth is you haven’t, all they want is your money, so stay safe, keep your money in the bank and do your homework before parting with it.
homework kid


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