Inflation and High Interest Rates Impact Timeshare Portfolios

How is the U.S. economy doing? It depends upon whom you ask. If you get your information from official government figures, you probably think things are OK. But if we didn’t assume it already, we learned recently that producers of government economic reports are expected to have the outlook of Voltaire’s incurably optimistic Dr. Pangloss rather than the dispassionate scholarship of legendary economist Milton Friedman.

If you’re looking closely at timeshare receivable portfolios, you probably have a less optimistic view of the economy than government statistics indicate. A representative sample of some of the larger portfolios financed by Colebrook shows a serious increase in delinquency during the past year.

The default rate is the annual pace at which accounts are either canceled or become 60 days delinquent. Portfolio E, which has the least variance, is the newest, with less prior history. The FICO requirements are essentially similar for each portfolio, and it is interesting to note that Portfolio B, which has the lowest default rate, has the highest sales prices. It appears that, as expected, upscale purchasers are better able to weather the current conditions.

In previous economic downturns, unemployment was a major cause of consumer loan defaults. In October 2009, the unemployment rate was 10%. In August 2025, it was a modest 4.3%. A lack of jobs is not the problem, as any manager trying to fill vacant positions can tell you. Consumers are struggling with expenses rather than income; the price of everything is higher than it was a couple of years ago.

America is a nation of debtors, and the amount of consumer debt has increased alarmingly, from $8 trillion in 2004 to more than $18 trillion today. What’s even more alarming is that debt is shifting from mortgages to credit cards, which generally carry much higher rates and have no corresponding asset. At industry conferences, we’ve learned that younger generations value experience over tangible goods. When the experience is over, all that remains are memories and credit card debt.

Those who borrow for timeshare purchases generally carry more debt than the average household and are therefore more subject to financial stress. In most cases the downpayment is a credit card transaction. One of our customers sells a high-end product, and it’s common to see a downpayment consisting of charges to several cards totaling $25-75,000 or more.

Many timeshare purchasers take developer financing at closing with the intent of paying off the loan through a lower rate home equity advance. Home equity rates are frequently tied to the prime rate, which has increased significantly in recent years, squeezing the gap between the interest rates on timeshare loans, which almost invariably carry fixed rates, and home equity loans.

We looked at prepayment rates in Portfolio A, which has a long history.

As seen above, prepayment speed was cut in half when interest rates increased. Under a typical hypothecation loan, 100% of the proceeds go to a lender that advanced perhaps 85%. That accelerates principal payments, reduces interest costs, and builds significant equity. And a customer who prepays won’t default down the road.

The reduction of prepayment volume is an indirect effect of high interest rates; the direct impact is a higher rate on variable rate hypothecation loans. The recent rate environment has squeezed arbitrage income to the point that, after servicing fees and defaults, there may be little left.

We recently estimated the impact of higher defaults and interest rates on the Portfolio E borrowing base. At the time of the analysis, there was an actual borrowing base surplus of $117,000. If defaults had tracked historical trends, the surplus would have been $670,000. If, in addition to lower defaults, the prime rate had averaged 3.25%, the lowest level of the past few years, the surplus would have been a whopping $1,995,000. That’s a huge difference. In prior years, developers were able to access borrowing base surpluses for new initiatives, capital improvements, or other purposes. With higher interest and default rates, those funds are rarely available.

Related: Weathering the Storm: Customer Service Enhances Portfolio Performance

It’s been a rough few years for timeshare portfolios. Lenders are still protected, but the substantial equity buildup of previous years has virtually disappeared. Portfolio quality can be enhanced by a high penetration level of automated payments, good customer service, and a sound sales process. Yet, one of the most solid building blocks for a strong portfolio is creating a sense of value in the product. People pay for things they value and won’t pay when they don’t see value.

Lower interest rates, which virtually all prognosticators believe will come soon, will help, but the solution is not that simple. The massive amount of new consumer debt won’t go away and prices won’t go down; a strong focus on collections and customer service should be permanent operating procedure, not a reaction to crisis. The glory days of 2013 aren’t around the corner, but we should start to see some equity creeping back into the portfolios of those companies that keep their eye on the ball.

A founding principal of Colebrook Financial, Bill Ryczek brings more than four decades of leadership and expertise in timeshare lending.