13  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. The executed transactions typically include minimal cash reserves established at time of sale as well as default and delinquency triggers, which are monitored on a monthly basis.

We 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.

The changes in servicing assets for year-end 2008 and year-end 2009, measured using the fair value method were:

(1) Principally represents changes due to collection/realization of expected cash flows over time and changes in fair value due to changes in key variables listed below.

(2) Represents release of servicing assets related to the repurchase of outstanding note sale pools.

At year-end 2009, $1,235 million of principal due from timeshare interval and fractional owners remained outstanding in 13 special purpose entities formed in connection with our timeshare note sales. Delinquencies of more than 90 days amounted to $16 million. The impact to us from delinquencies, and our maximum exposure to loss as a result of our involvement with these special purpose entities, is limited to our residual interests and servicing assets, as discussed in Footnote No. 5, "Fair Value Measurements." Please see the "Timeshare Residual Interests Valuation" caption in Footnote No. 21, "Restructuring Costs and Other Charges" for additional information on the risks associated with our residual interests. Under the terms of our timeshare note sales, we have the right, at our option, to repurchase defaulted mortgage notes at par. The transaction documents typically limit such repurchases to 10 percent of the transaction's initial mortgage balance, but during 2009, investors in three of our outstanding note sale transactions agreed to increase the applicable limit to 15 percent. In cases where we have chosen to exercise this repurchase right, we have been able to resell the timeshare units underlying the defaulted loans without incurring material losses although we may not be able to do so in the future.

Cash flows between us and third-party purchasers during 2009, 2008, and 2007 were as follows: net proceeds to us from new timeshare note sales of $349 million, $237 million, and $515 million respectively; voluntary repurchases by us of defaulted notes (over 150 days overdue) of $81 million, $56 million, and $30 million respectively; servicing fees received by us of $6 million, $6 million, and $6 million, respectively; and cash flows received from our retained interests of $75 million, $96 million, and $100 million respectively.

We earned contractually specified servicing fees of $6 million in 2009, $6 million in 2008, and $6 million in 2007. We also earned contractually specified late fees and ancillary fees of $7 million in 2009, $7 million in 2008, and $7 million in 2007. We reflect all of these fees within the "Timeshare sales and services" line in our "Condensed Consolidated Statements of Income."

In 2009, 2008, and 2007, we sold notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional ownership products of $446 million, $300 million, and $520 million, respectively. During 2009, we entered into two note sale transactions for $284 million and $380 million. The second of these transactions included our reacquisition and sale of $218 million of notes that were previously securitized in the first transaction. Each note sale was made to a newly formed transaction-specific trust that, simultaneously with its purchase of the notes receivable, issued $522 million, $246 million, and $520 million, respectively, of the trust's notes. In connection with the sale of the notes receivable, we received net proceeds of $349 million in 2009, $237 million in 2008, and $515 million in 2007. We have included gains from the sales of timeshare notes receivable totaling $37 million in 2009, $16 million, net of $12 million of hedge ineffectiveness, in 2008, and $81 million in 2007 in the "Timeshare sales and services" revenue caption in our Consolidated Statements of Income.

See Footnote No. 5, "Fair Value Measurements," in this report for further discussion of our servicing assets and residual interests. Additionally, see our "New Accounting Standards" discussion in "Management's Discussion and Analysis" on the adoption of ASU 2009-17 in 2010 and its potential impact.

> Back to top of page

> Go to next page