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VACATION OWNERSHIP NOTES RECEIVABLE
 9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
VACATION OWNERSHIP NOTES RECEIVABLE
6.
VACATION OWNERSHIP NOTES RECEIVABLE

The following table shows the composition of our vacation ownership notes receivable balances, net of reserves.
 
September 30, 2019
 
December 31, 2018
($ in millions)
Originated
 
Acquired
 
Total
 
Originated
 
Acquired
 
Total
Securitized
$
1,169

 
$
417

 
$
1,586

 
$
1,070

 
$
557

 
$
1,627

Non-securitized
 
 
 
 
 
 
 
 
 
 
 
Eligible for securitization(1)
214

 
11

 
225

 
85

 
22

 
107

Not eligible for securitization(1)
298

 
59

 
357

 
233

 
72

 
305

Subtotal
512

 
70

 
582

 
318

 
94

 
412

 
$
1,681

 
$
487

 
$
2,168

 
$
1,388

 
$
651

 
$
2,039


_________________________
(1) 
Refer to Footnote 7 “Financial Instruments” for a discussion of eligibility of our vacation ownership notes receivable for securitization.
We reflect interest income associated with vacation ownership notes receivable in our Income Statements in the Financing revenues caption. The following table summarizes interest income associated with vacation ownership notes receivable.
 
Three Months Ended
 
Nine Months Ended
($ in millions)
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Interest income associated with vacation ownership notes receivable — securitized
$
58

 
$
42

 
$
176

 
$
95

Interest income associated with vacation ownership notes receivable — non-securitized
11

 
3

 
25

 
18

Total interest income associated with vacation ownership notes receivable
$
69

 
$
45

 
$
201

 
$
113


Acquired Vacation Ownership Notes Receivable
As part of the ILG Acquisition, we acquired existing portfolios of vacation ownership notes receivable. These notes receivable are accounted for using the expected cash flow method of recognizing discount accretion based on the expected cash flows from the acquired vacation ownership notes receivable pursuant to ASC 310-30, “Loans acquired with deteriorated credit quality” (“ASC 310-30”). At acquisition, we recorded these vacation ownership notes receivable at fair value, which included a credit discount that is accreted as an adjustment to yield over the estimated life of the vacation ownership notes receivable.
The fair value of our acquired vacation ownership notes receivable as of the Acquisition Date was determined using a discounted cash flow method, which calculated a present value of expected future cash flows based on scheduled principal and interest payments over the term of the respective vacation ownership notes receivable, while considering anticipated defaults and early repayments based on historical experience. Consequently, the fair value of the acquired vacation ownership notes receivable recorded on our balance sheet as of the Acquisition Date included an estimate for future uncollectible amounts, which became the historical cost basis for that portfolio going forward.
The table below presents a rollforward from December 31, 2018 of the accretable yield (interest income) expected to be earned related to our acquired vacation ownership notes receivable, as well as the amount of non-accretable difference at the end of the period. The non-accretable difference represents estimated contractually required payments in excess of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the carrying amount of the acquired vacation ownership notes receivable.
($ in millions)
Nine Months Ended September 30, 2019
Accretable yield balance at December 31, 2018
$
199

Accretion
(61
)
Reclassification from non-accretable difference
43

Accretable yield balance at September 30, 2019
$
181

 
 
Non-accretable difference at September 30, 2019
$
52


The accretable yield is recognized into interest income over the estimated life of the acquired vacation ownership notes receivable using the level yield method. The accretable yield may change in future periods due to changes in the anticipated remaining life of the acquired vacation ownership notes receivable, which may alter the amount of future interest income expected to be collected, and changes in expected future principal and interest cash collections, which impacts the non-accretable difference.
The cash flow from our acquired vacation ownership notes receivable are remeasured at period end based on expected future cash flows, which takes into consideration an estimated measure of anticipated defaults and early repayments. We consider historical Legacy-ILG vacation ownership notes receivable performance and the current economic environment in developing the expected future cash flows used in the re-measurement of our acquired vacation ownership notes receivable.
The following table shows future contractual principal payments, as well as interest rates for our non-securitized and securitized acquired vacation ownership notes receivable, at September 30, 2019.
 
Acquired Vacation Ownership Notes Receivable
($ in millions)
Non-Securitized
 
Securitized
 
Total
2019, remaining
$
2

 
$
12

 
$
14

2020
6

 
49

 
55

2021
7

 
49

 
56

2022
7

 
50

 
57

2023
7

 
49

 
56

Thereafter
41

 
208

 
249

Balance at September 30, 2019
$
70

 
$
417

 
$
487

Weighted average stated interest rate
13.2%
 
13.4%
 
13.4%
Range of stated interest rates
3.5% to 17.9%
 
6.0% to 16.9%
 
3.5% to 17.9%

 Originated Vacation Ownership Notes Receivable
Originated vacation ownership notes receivable represent vacation ownership notes receivable originated by Legacy-ILG subsequent to the Acquisition Date and all Legacy-MVW vacation ownership notes receivable. The following table shows future principal payments, net of reserves, as well as interest rates, for our originated non-securitized and securitized originated vacation ownership notes receivable at September 30, 2019.
 
Originated Vacation Ownership Notes Receivable
($ in millions)
Non-Securitized
 
Securitized
 
Total
2019, remaining
$
18

 
$
26

 
$
44

2020
66

 
104

 
170

2021
53

 
113

 
166

2022
45

 
121

 
166

2023
41

 
125

 
166

Thereafter
289

 
680

 
969

Balance at September 30, 2019
$
512

 
$
1,169

 
$
1,681

Weighted average stated interest rate
12.1%
 
12.7%
 
12.5%
Range of stated interest rates
0.0% to 18.0%
 
5.2% to 17.5%
 
0.0% to 18.0%

For originated vacation ownership notes receivable, we record the difference between the vacation ownership note receivable and the variable consideration included in the transaction price for the sale of the related vacation ownership product as a reserve on our vacation ownership notes receivable.
The following table summarizes the activity related to our originated vacation ownership notes receivable reserve.
 
Originated Vacation Ownership Notes Receivable Reserve
($ in millions)
Non-Securitized
 
Securitized
 
Total
Balance at December 31, 2018
$
61

 
$
79

 
$
140

Increase in vacation ownership notes receivable reserve
62

 
14

 
76

Securitizations
(47
)
 
47

 
—

Clean-up call(1)
19

 
(19
)
 
—

Write-offs
(35
)
 
—

 
(35
)
Defaulted vacation ownership notes receivable repurchase activity(2)
28

 
(28
)
 
—

Balance at September 30, 2019
$
88

 
$
93

 
$
181

_________________________
(1) 
Refers to our voluntary repurchase of previously securitized non-defaulted vacation ownership notes receivable to retire outstanding vacation ownership notes receivable from our Warehouse Credit Facility.
(2) 
Decrease in securitized vacation ownership notes receivable reserve and increase in non-securitized vacation ownership notes receivable reserve was attributable to the transfer of the reserve when we voluntarily repurchased defaulted securitized vacation ownership notes receivable.
Credit Quality of Vacation Ownership Notes Receivable
Legacy-MVW Vacation Ownership Notes Receivable
Although we consider loans to owners to be past due if we do not receive payment within 30 days of the due date, we suspend accrual of interest only on those loans that are over 90 days past due. We consider loans over 150 days past due to be in default and fully reserve such amounts. We apply payments we receive for vacation ownership notes receivable on non-accrual status first to interest, then to principal and any remainder to fees. We resume accruing interest when vacation ownership notes receivable are less than 90 days past due. We do not accept payments for vacation ownership notes receivable during the foreclosure process unless the amount is sufficient to pay all past due principal, interest, fees and penalties owed and fully reinstate the note. We write off vacation ownership notes receivable against the reserve once we receive title to the vacation ownership products through the foreclosure or deed-in-lieu process or, in Asia Pacific or Europe, when revocation is complete. For both Legacy-MVW non-securitized and securitized vacation ownership notes receivable, we estimated average remaining default rates of 7.00 percent and 7.01 percent as of September 30, 2019 and December 31, 2018, respectively. A 0.5 percentage point increase in the estimated default rate would have resulted in an increase in our vacation ownership notes receivable reserve of $7 million as of both September 30, 2019 and December 31, 2018.
The following table shows our recorded investment in non-accrual Legacy-MVW vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due.
 
Legacy-MVW Vacation Ownership Notes Receivable
($ in millions)
Non-Securitized
 
Securitized
 
Total
Investment in vacation ownership notes receivable on non-accrual status at September 30, 2019
$
41

 
$
9

 
$
50

Investment in vacation ownership notes receivable on non-accrual status at December 31, 2018
$
36

 
$
9

 
$
45

Average investment in vacation ownership notes receivable on non-accrual status during the third quarter of 2019
$
41

 
$
9

 
$
50

Average investment in vacation ownership notes receivable on non-accrual status during the third quarter of 2018
$
40

 
$
6

 
$
46

Average investment in vacation ownership notes receivable on non-accrual status during the first three quarters of 2019
$
39

 
$
9

 
$
48

Average investment in vacation ownership notes receivable on non-accrual status during the first three quarters of 2018
$
39

 
$
7

 
$
46


The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-MVW vacation ownership notes receivable as of September 30, 2019.
 
Legacy-MVW Vacation Ownership Notes Receivable
($ in millions)
Non-Securitized
 
Securitized
 
Total
31 – 90 days past due
$
8

 
$
21

 
$
29

91 – 150 days past due
3

 
9

 
12

Greater than 150 days past due
38

 
—

 
38

Total past due
49

 
30

 
79

Current
314

 
1,118

 
1,432

Total vacation ownership notes receivable
$
363

 
$
1,148

 
$
1,511

The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-MVW vacation ownership notes receivable as of December 31, 2018.
 
Legacy-MVW Vacation Ownership Notes Receivable
($ in millions)
Non-Securitized
 
Securitized
 
Total
31 – 90 days past due
$
7

 
$
26

 
$
33

91 – 150 days past due
3

 
9

 
12

Greater than 150 days past due
33

 
—

 
33

Total past due
43

 
35

 
78

Current
235

 
1,090

 
1,325

Total vacation ownership notes receivable
$
278

 
$
1,125

 
$
1,403


Legacy-ILG Vacation Ownership Notes Receivable
On an ongoing basis, we monitor credit quality of our Legacy-ILG vacation ownership notes receivable portfolio based on payment activity as follows:
•
Current — The vacation ownership note receivable is in good standing as payments and reporting are current per the terms contractually stipulated in the agreement.
•
Delinquent — We consider a vacation ownership note receivable to be delinquent based on the contractual terms of each individual financing agreement.
•
Non-performing — Our vacation ownership notes receivable are generally considered non-performing if interest or principal is more than 30 days past due. All non-performing vacation ownership notes receivable are placed on non-accrual status when they are over 90 days past due. We resume accruing interest when vacation ownership notes receivable are less than 90 days past due. We apply payments we receive for vacation ownership notes receivable on non-performing status first to interest, then to principal, and any remainder to fees.
We consider vacation ownership notes receivable to be in default upon reaching 120 days outstanding. We use the origination of the vacation ownership notes receivable by brand (Hyatt, Sheraton or Westin) and the FICO scores of the customer as the primary credit quality indicators for our Legacy-ILG vacation ownership notes receivable, as historical performance indicates that there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership property they have acquired, supplemented by the FICO scores of the customers.
At September 30, 2019 and December 31, 2018, the weighted average FICO score within our consolidated Legacy-ILG vacation ownership notes receivable pools was 711 and 710, respectively, based upon the outstanding vacation ownership notes receivable balance at time of origination. The average estimated rate for all future defaults for our Legacy-ILG consolidated outstanding pool of vacation ownership notes receivable as of September 30, 2019 and December 31, 2018 was 12.47 percent and 12.37 percent, respectively. A 0.5 percentage point increase in the estimated default rate on the Legacy-ILG originated vacation ownership notes receivable would have resulted in an increase in the related vacation ownership notes receivable reserve of $2 million and $1 million as of September 30, 2019 and December 31, 2018, respectively.
The following table shows the Legacy-ILG acquired vacation ownership notes receivable by brand and FICO score as of September 30, 2019.
 
Acquired Vacation Ownership Notes Receivable
($ in millions)
700 +
 
600 - 699
 
< 600
 
No Score(1)
 
Total
Westin
$
113

 
$
63

 
$
5

 
$
15

 
$
196

Sheraton
105

 
92

 
17

 
40

 
254

Hyatt
17

 
11

 
1

 
1

 
30

Other
4

 
1

 
—

 
2

 
7

 
$
239

 
$
167

 
$
23

 
$
58

 
$
487

_________________________
(1) 
Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
The following table shows the Legacy-ILG acquired vacation ownership notes receivable by brand and FICO score as of December 31, 2018.
 
Acquired Vacation Ownership Notes Receivable
($ in millions)
700 +
 
600 - 699
 
< 600
 
No Score(1)
 
Total
Westin
$
154

 
$
82

 
$
6

 
$
21

 
$
263

Sheraton
145

 
124

 
21

 
55

 
345

Hyatt
20

 
13

 
2

 
—

 
35

Other
4

 
1

 
—

 
3

 
8

 
$
323

 
$
220

 
$
29

 
$
79

 
$
651

_________________________
(1) 
Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
The following table shows the Legacy-ILG originated vacation ownership notes receivable by brand and FICO score as of September 30, 2019.
 
Originated Vacation Ownership Notes Receivable
($ in millions)
700 +
 
600 - 699
 
< 600
 
No Score(1)
 
Total
Westin
$
101

 
$
39

 
$
4

 
$
18

 
$
162

Sheraton
79

 
51

 
10

 
29

 
169

Hyatt
13

 
6

 
—

 
—

 
19

 
$
193

 
$
96

 
$
14

 
$
47

 
$
350

_________________________
(1) 
Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
The following table shows the Legacy-ILG originated vacation ownership notes receivable by brand and FICO score as of December 31, 2018.
 
Originated Vacation Ownership Notes Receivable
($ in millions)
700 +
 
600 - 699
 
< 600
 
No Score(1)
 
Total
Westin
$
43

 
$
11

 
$
1

 
$
7

 
$
62

Sheraton
28

 
17

 
3

 
9

 
57

Hyatt
5

 
2

 
—

 
—

 
7

 
$
76

 
$
30

 
$
4

 
$
16

 
$
126

_________________________
(1) 
Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-ILG originated vacation ownership notes receivable as of September 30, 2019 and December 31, 2018.
 
Originated Vacation Ownership Notes Receivable
 
 
 
 
 
Delinquent
 
Defaulted(1)
 
Total Delinquent & Defaulted
($ in millions)
Receivables
 
Current
 
30 - 59 Days
 
60 - 89 Days
 
90 - 119 Days
 
> 120 Days
 
As of September 30, 2019
$
350

 
$
340

 
$
5

 
$
3

 
$
2

 
$
—

 
$
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
$
126

 
$
124

 
$
2

 
$
—

 
$
—

 
$
—

 
$
2

_________________________
(1) 
Vacation ownership notes receivable equal to or greater than 120 days are considered in default.