SALT LAKE CITY – NCUA, acting as liquidating agent for failed HeritageWest FCU, has filed suit against several members of the defunct credit union claiming the members defaulted on millions of dollars in speculative real estate loans only to buy the properties back at steep discounts in foreclosure sales.
The suits, removed to a federal court last week, are the latest in a variety of legal actions surrounding a troubled Salt Lake City residential development called Castle Stone Homes that was tied closely to the one-time $330 million credit union. Dozens of the project’s borrowers, who were promised high returns, obtained loans through the credit union, which was acquired by Virginia’s Chartway FCU in a December supervisory merger engineered by NCUA.
The case is reminiscent of those involving two big credit union failures, Norlarco CU and Huron River Area CU, which financed speculative real estate projects in Florida’s Gulf Coast. The two credit unions, $360 million Colorado-based Norlarco and $320 million Michigan-based Huron River Area, eventually went bust along with the two developments, known as Lehigh Acres and Cape Coral, which are located just east of Fort Myers.
In the Salt Lake City case, the members claim that HeritageWest engaged in a variety of schemes to make loans readily available for the residential development. According to various courts documents, between 2005 and 2007 Castle Stone solicited individual investors with high credit scores to participate in their residential development designed to appeal to first-time investors that would provide big profits. After one of the initial lenders for the project, America First CU, backed out, HeritageWest agreed to provide capital for the investors.
Lawyers for Castle Stone did not return phone calls. NCUA declined to comment, saying it does not discuss cases in litigation.
But according to various suits in the case, the investment scheme began to unravel about 14 months after construction began as the nation’s mortgage crisis was spreading, and many of the homes were left only 50% to 75% complete. HeritageWest then agreed to refinance the loans to facilitate completion of the project. According to the suits, the credit union agreed to the refis without reliable appraisals and pressured borrowers to sign new loan agreements or risk losing their investments.
Three years later many of the homes are still not completed and have been foreclosed on. In some cases, the borrowers have repurchased them in foreclosure sales at significant discounts. According to the recent suits filed by NCUA, one borrower bought his house back at a $220,000 discount to what he owes on the loans, another borrower a $215,000 discount and a third a $115,000 discount.
In a suit filed last September in federal court in Utah, approximately two dozen of the borrowers are alleging Castle Stone and HeritageWest engaged in securities fraud in selling the speculative homes as get-rich investments. In newspaper, TV and radio ads, the development was promoted as a “creative way to profit in real estate,” with “no cash out of pocket.” The developer promised to pay “half the long term interest payments up to half its profits on any project,” if the houses didn’t resell right away.
As in the Florida cases, the ensuing failure of the real estate development brought down the project’s lender, in this case HeritageWest, eventually leaving NCUA holding the bag for millions of dollars in resulting losses.
HeritageWest was chartered in 1948 as Benecia Arsenal FCU to serve employees at Benicia Arsenal, Benecia, Calif., then changed its name to Tooele Army Depot FCU after the arsenal was moved to Tooele, Utah in 1961. In 2003 the credit union was granted one of the biggest community charters ever to that time to serve more than 1.5 million people in greater Salt Lake City, precipitating its name change to HeritageWest. By the time NCUA liquidated the credit union and assigned its remnants to Chartway FCU in a purchase and assumption agreement, the credit union had lost $12.4 million in 2008 and a whopping $16.9 million in 2009.
