ANN ARBOR, Mich. -- The losses at Huron River Area Credit Unionmay have already sunk the CU and the footsteps of a purchase andassumption may not be far behind. HRACU may well go the way ofNorlarco Credit Union in Fort Collins, Colo., which the NCUA put upfor sale to the highest bidder a few weeks ago.

HRACU reported $73.1 million in loans that are more thantwo-months delinquent in the third quarter, compared to $37.4million for the end of June and only $3.5 million in Sept. 2006.The $71.1 million is all in the first mortgage fixed rate/hybridballoon loan category, most of which were made in Lee CountyFlorida, the now infamous Lehigh Acres land development alsoassociated with Norlarco. HRACU has been in conservatoship sincelast February and is being run by NCUA.

The increasing liability in delinquency, with $19.3 million inthe one to two month category, $60.4 million in the two to sixmonth category, $11.1 million in the six to 12 month category and$1.1 million in the 12 months and over time frame doesn't seem topresent any hope for improvement.

In what may be a preparatory move to seeking a CU buyer forHuron River, NCUA officials had it write down $68.1 million.Overall it has lost $59.1 million from the start of the year. Andlike Norlarco, the CU has been losing members in the wake ofrevelations that it invested so heavily in speculative real estate,making loans to members that hardly met the qualifications to doso, or joined through a backdoor method.

Many of the real estate loans it made to out-of-state residentswere through a Michigan corporation, The Construction Loan Company,Howell, Mich., and are tied up in lawsuits. Neither the Michiganregulator, Roger Little, officials at the CU or NCUArepresentatives are willing to address the appropriateness of a CUconducting its lending business in this manner. But one CU CEO whospoke off the record (and is not involved) offered that when a CUgoes outside its comfort zone and the normal pattern of CUoperations it is courting disaster. "What were they thinking?" heasked. "When they're looking to just make money even credit unionfolks can lose their way, and it appears these guys made some verypoor choices in who they did business with. The whole thing willend up giving credit unions a black eye and give bankers fodder tosay, 'See! Credit unions are making risky loans! They'respeculating! Credit unions are not supposed to be doing that sortof thing."

Such questionable loan underwriting isn't typical in the CUworld, but sources told Credit Union Times that it shows how eventypically conservative institutions can take bad positions duringthe euphoria of a housing bubble. "Look," said another credit unionCEO, "how people got carried away thinking home values could go inonly one direction, up, up and away. Now, credit unions aresupposed to know better, have a more balanced approach to the wholeportfolio, but these errors in judgment can occur, obviously. Ijust hope that what has happened here isn't perceived as common inthe credit union world, because it isn't."

Many borrowers have also filed suit against First Home Builders,which built houses in Lee County. They allege fraud and conspiracyin the marketing, sale and financing of the homes. (First Home isnow owned by K. Hovnanian Enterprises.) Hovnanian has been tryingto offload many of the homes in "Red Tag" sales by lowering prices.But real estate specialists believe that by flooding the marketwith lower prices (when so many are already underwater due to thehousing slump) will just further aggravate the situation. Buyerstypically wait out a market where prices are declining, hoping fora rock-bottom price. NCUA may well end up holding a swath ofsoutheastern Florida real estate in its own portfolio for sometime, unless it is willing to accept pennies on the dollar and takea hit to the NCUSIF.

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