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 Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 >  11 ASSET SECURITIZATIONS We periodically sell, without recourse, through special purpose entities, notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional products. We continue to service the notes and transfer all proceeds collected to special purpose entities. We retain servicing assets and other interests in the notes and account for these assets and interests as residual interests. The interests are limited to the present value of cash available after paying financing expenses and program fees and absorbing credit losses. Prior to the start of the 2007 fiscal year, we measured servicing assets at the date of sale at their allocated previous carrying amount based on relative fair value, classified those assets as held to maturity under the provisions of FAS No. 115 and recorded those assets at amortized cost. On December 30, 2006, the first day of fiscal year 2007, we adopted FAS No. 156. In conjunction with the adoption of FAS No. 156, we elected to subsequently measure our servicing assets using the fair value method. Under the fair value method, we carry servicing assets on the balance sheet at fair value, and report the changes in fair value, primarily due to changes in valuation inputs and assumptions and to the collection or realization of expected cash flows, in earnings in the period in which the change occurs. To determine the fair value of servicing assets, we use a valuation model that calculates the present value of estimated future net servicing income, which is based on the monthly fee we receive for servicing the securitized notes. We use market assumptions in the valuation model, including estimates of prepayment speeds, default rates, and discount rates. We have inherent risk for changes in the fair value of the servicing asset but do not deem the risk significant and therefore, do not use other financial instruments to mitigate this risk. Effective December 30, 2006, upon the remeasurement of our servicing assets at fair value, we recorded a cumulative-effect adjustment to the 2007 beginning balance of retained earnings of $1 million after-tax ($2 million pretax) in our Consolidated Statements of Shareholders' Equity. Accordingly, servicing assets totaled $11 million at year-end 2006 and $13 million on the first day of fiscal year 2007. At year-end 2007, servicing assets totaled $15 million. The table below reconciles the servicing assets balance at year-end 2006, to the beginning balance on December 30, 2006.
The changes in servicing assets, measured using the fair value method, were:
Contractually specified servicing fees, late fees, and ancillary fees earned for 2007, 2006, and 2005 totaled $6 million, $5 million, and $4 million, respectively, and were reflected within the changes in fair value to the servicing assets noted above. We have included gains from the sales of timeshare notes receivable totaling $81 million in 2007 and $77 million in 2006 within the "Timeshare sales and services" revenue caption in our Consolidated Statements of Income. Gains from the sale of timeshare notes receivable of $69 million in 2005 are in the "Gains and other income" caption in the accompanying Consolidated Statements of Income. For additional information regarding the classification of gains from the sale of timeshare notes receivable, see the "Basis of Presentation" caption in Footnote No. 1, "Summary of Significant Accounting Policies." In addition, in September 2006, we repurchased notes receivable with a principal balance of $31 million and in November 2006, sold those notes, along with $249 million of additional notes in a $280 million note securitization. The gain on the sale of these notes is included in the $77 million gain noted earlier in this paragraph. We had residual interests of $238 million and $221 million, respectively, at year-end 2007 and year-end 2006, which are recorded in the accompanying Consolidated Balance Sheets as other long-term receivables of $157 million and $137 million, respectively, and other current assets of $81 million and $84 million, respectively. At the dates of sale and at the end of each reporting period, we estimate the fair value of residual interests, including servicing assets, using a discounted cash flow model. These transactions may utilize interest rate swaps to protect the net interest margin associated with the beneficial interest. We report in income, changes in the fair value of residual interests, including servicing assets, as they are considered trading securities under the provisions of FAS No. 115. During 2007, 2006, and 2005, we recorded trading gains of $30 million, $19 million, and $2 million, respectively. We used the following key assumptions to measure the fair value of the residual interests, including servicing assets, at the date of sale during 2007, 2006, and 2005: average discount rate of 9.02 percent, 9.22 percent, and 8.56 percent, respectively; average expected annual prepayments, including defaults, of 25.02 percent, 25.22 percent, and 23.56 percent, respectively; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 75 months, 70 months, and 79 months, respectively; and expected weighted average life of prepayable notes receivable, including prepayments and defaults of 34 months, 32 months, and 38 months, respectively. Our key assumptions are based on experience. We used the following key assumptions in measuring the fair value of the residual interests, including servicing assets, in our 11 outstanding note sales at year-end 2007: an average discount rate of 7.96 percent; an average expected annual prepayment rate, including defaults, of 19.58 percent; an expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 62 months; and an expected weighted average life of prepayable notes receivable, including prepayments and defaults of 35 months. Cash flows between us and third-party purchasers during 2007, 2006, and 2005, were as follows: net proceeds to us from new timeshare note sales of $515 million, $508 million, and $399 million, respectively; repurchases by us of defaulted loans (over 150 days overdue) of $30 million, $24 million, and $23 million, respectively; repurchases by us of other loans in 2006 of $31 million; servicing fees received by us of $6 million, $5 million, and $4 million, respectively; and cash flows received from our retained interests of $100 million, $91 million, and $86 million, respectively. At year-end 2007, $1,263 million of principal remained outstanding in all sales in which we had a retained residual interest. Delinquencies of more than 90 days at year-end 2007 amounted to $10 million. Existing reserves were adequate for defaulted loans that were resolved during 2007. We have been able to resell timeshare units underlying defaulted loans without incurring material losses. We completed a stress test on the fair value of the residual interests as of year-end 2007 with the objective of measuring the change in value associated with independent changes in individual key variables. The methodology used applied unfavorable changes that would be considered statistically significant for the key variables of prepayment rate, discount rate, and weighted average remaining term. The fair value of the residual interests was $238 million at year-end 2007, before we applied any stress test changes. An increase of 100 basis points in the prepayment rate would decrease the year-end valuation by $4 million, or 1.9 percent, and an increase of 200 basis points in the prepayment rate would decrease the year-end valuation by $9 million, or 3.7 percent. An increase of 100 basis points in the discount rate would decrease the year-end valuation by $5 million, or 2.3 percent, and an increase of 200 basis points in the discount rate would decrease the year-end valuation by $11 million, or 4.4 percent. A decline of two months in the weighted average remaining term would decrease the year-end valuation by $3 million, or 1.1 percent, and a decline of four months in the weighted average remaining term would decrease the year-end valuation by $5 million, or 2.3 percent. > Back to top of page |
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