ALEXANDRIA, Va.–The downturn in the mortgage market has been blamed for the demise of four credit unions biting the dust this year after posting huge losses from home loans and home equity lines of credit.
Despite being separated by size and geography, New Horizons Credit Union in Denver, Norlarco Credit Union in Fort Collins, Colo., Huron River Area Credit Union in Ann Arbor, Mich., and Cal State 9 Credit Union in Concord, Calif., shared several distinctions: they chased yield and neglected to either set or keep to an Asset Liability Management program that balanced risk with sound lending principles and in member communications they touted a growing lending portfolio only as a strength. The boards of directors, management and supervisory committees seemed to overlook the greater fiduciary responsibility to the CU's membership and made risky loan choices even as they were charged with accountability.
Regulators conserved the credit unions without publicity when the troubles were detected, earning the membership's ire when the news finally broke in local newspaper stories. NCUA placed all four into conservatorship and has already sold off New Horizons to Security Service CU of San Antonio, Texas, and Huron River Area's skeleton to Detroit Edison CU. Bidders for Norlarco's remaining operations and branches await a final outcome and Cal State 9 CU's future remains murky, but may soon follow a similar path.
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In the New Horizons, Huron Area and Norlarco cases, the CUs' extended real estate loan programs got caught up in construction loans for homes in southwest Florida, particularly in the Lehigh Acres and Cape Coral developments. When the Florida housing boom went bust, the CUs found that the outsourced providers of those loans made some shaky decisions on their behalf, making Florida residents members of their distant credit union. As defaults mounted, losses on the CU's books went skyward. Each quarter brought new losses to light, and along with them, questions that still remain, chiefly, why? Why did two Colorado CUs and one in Michigan deem it fit to invest in speculative real estate in Florida's gulf? And what business connection, if any, ties them together?
There are lawsuits pending that may answer those questions, but they will be handled now by the NCUA. The former chairman of Norlarco, John Olienyk, (from 1991 until the conservatorship) told The Coloradoan newspaper that residential construction loans posed the biggest problems for the credit union's balance sheet.
"We had construction loans on the books from around the country," including Florida, said Olienyk, associate dean of the College of Business at Colorado State University. When the downturn hit the real estate market and buyers began to default in droves, Norlarco felt the hit.
Olienyk also blamed the problem on the overall housing slump, including subprime mortgage loans, rising interest rates, decreasing demand and record-level foreclosures. "All of those things combined to depress housing prices, so we got the slump in real estate that we are witnessing." The local construction market, while not strong, has not been the primary cause of the problem, he said.
But none of that explains how or why Norlarco dipped its members' money into a real estate development just east of the Gulf of Mexico. Regulators were monitoring the credit union from early in the year, and reached the point where they wanted more direct control over the resolution of the loan issues, Olienyk said.
Oversight? What Oversight?
The Treasurer of Cal State 9 CU was James Wilcox, an economics professor at the University of California Berkeley Haas School of Business. Wilcox has written many economic papers and done research for the Filene Institute.
In "Policies and Prescriptions for Safe and Sound Banking: Shocks, Lessons and Prospects" (http://www.frbatlanta.org/filelegacydocs/erq107_Wilcox.pdf) from Economic Review, First and Second Quarters 2007, he writes: "Better risk management can, in turn, stimulate better regulation… Regulators may permit more experimentation among "better" banks. What will happen when major adverse shocks strike again, as they are likely to, eventually, is not altogether clear. The regulatory regime implemented over the past two decades might work as well as it is presumed to work. The current substantial capital buffers might well shield banks and the macroeconomy from serious implications."
Cal State 9 CU's board had other business experts and university professionals, none of whom were willing to speak on the record about decisions they made that led to the demise of a credit union formed in the World War II years that had a rich history of service to members. In less than two years, it was undercapitalized.
The only thing that shielded the accounts of members of all these credit unions was the deposit insurance protection of the NCUSIF.
Excuses heard so far are simply that credit union's tight operating margins placed so much pressure on managers to seek out new ways to earn money. High-risk loans bring higher yields, and as long as the real estate market was going up the picture was rosy.
Cal State 9 CU's descent varied from the other three only in that management there ramped up an outsourced indirect HELOC program to lend money. The CU set the parameters of the risk and demanded more and more loans as the market rose, extending the risk farther out. The correction came more swiftly than the rise as home values in California real estate sank, and the quarterly losses boomed.
The lessons to be learned may have to await disclosure of the nature of business decisions reached in the board rooms of these credit unions. Those decisions are only likely to be disclosed through the legal process of discovery. As lawsuits proceed, some light may be shed and eventually, responsibility assessed.
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