Huron River Haunted by Ghosts of Florida Real Estate Loans; Purchase and Assumption May Not Be Far Off

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

HRACU reported $73.1 million in loans that are more than two-months delinquent in the third quarter, compared to $37.4 million 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/hybrid balloon loan category, most of which were made in Lee County Florida, the now infamous Lehigh Acres land development also associated with Norlarco. HRACU has been in conservatoship since last February and is being run by NCUA.

The increasing liability in delinquency, with $19.3 million in the one to two month category, $60.4 million in the two to six month 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 to present any hope for improvement.

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

Many of the real estate loans it made to out-of-state residents were through a Michigan corporation, The Construction Loan Company, Howell, Mich., and are tied up in lawsuits. Neither the Michigan regulator, Roger Little, officials at the CU or NCUA representatives are willing to address the appropriateness of a CU conducting its lending business in this manner. But one CU CEO who spoke off the record (and is not involved) offered that when a CU goes outside its comfort zone and the normal pattern of CU operations it is courting disaster. "What were they thinking?" he asked. "When they're looking to just make money even credit union folks can lose their way, and it appears these guys made some very poor choices in who they did business with. The whole thing will end up giving credit unions a black eye and give bankers fodder to say, 'See! Credit unions are making risky loans! They're speculating! Credit unions are not supposed to be doing that sort of thing."

Such questionable loan underwriting isn't typical in the CU world, but sources told Credit Union Times that it shows how even typically conservative institutions can take bad positions during the euphoria of a housing bubble. "Look," said another credit union CEO, "how people got carried away thinking home values could go in only one direction, up, up and away. Now, credit unions are supposed to know better, have a more balanced approach to the whole portfolio, but these errors in judgment can occur, obviously. I just hope that what has happened here isn't perceived as common in the 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 conspiracy in the marketing, sale and financing of the homes. (First Home is now owned by K. Hovnanian Enterprises.) Hovnanian has been trying to offload many of the homes in "Red Tag" sales by lowering prices. But real estate specialists believe that by flooding the market with lower prices (when so many are already underwater due to the housing slump) will just further aggravate the situation. Buyers typically wait out a market where prices are declining, hoping for a rock-bottom price. NCUA may well end up holding a swath of southeastern Florida real estate in its own portfolio for some time, unless it is willing to accept pennies on the dollar and take a hit to the NCUSIF.

--cburger@cutimes.com