Bad Bets In Real Estate Make 2007 The Year Of Big Losses

ALEXANDRIA, Va. - For an industry that largely avoided making the kinds of subprime, variable-rate loans that have left millions of homeowners in fear of foreclosure, 2007 will nonetheless be remembered as the year the credit union community took a huge hit due to failed real estate.

And it’s a troubling problem that is likely to fester well into 2008 and beyond.

When 2007 began, few outside of Ft. Collins, Colo., had ever really heard of Norlarco Credit Union. By the end of the year it had become a one-word pejorative for failed investments and troubled loan participations. A unit of the credit union had invested heavily in two housing developments on Florida’s west coast when the state’s home market was as hot as the July weather. But when that balloon went bust it took three credit unions down with it, Norlarco, New Horizons Community FCU, also in Colorado, and Michigan’s Huron River Area Credit Union. All three are now in conservatorship and NCUA is hoping to pool some $400 million in distressed Florida loans made by the credit unions. (NCUA is currently reviewing bids from three Colorado CUs for Norlarco’s healthy assets, along with bids for the other two.)

The three failed credit unions got involved in the Florida projects, 2,000 miles away, through a real estate investment program known as “Millionaire University” that purported to teach middle-income investors to get rich. The program guaranteed a 14% return to invest in a house to be built and leased for one year, before the property would be flipped for high returns in the booming Florida real estate market. The loans were highly leveraged, with borrowers paying an average of just $1,000 for $250,000 mortgages.

The three credit unions were among more than a dozen lenders providing the highly leveraged mortgages. Others were Bank of America, Countrywide Financial, First Florida Bank, Ocwan Financial, and subprime mortgage units of Lehman Brothers and GMAC.

Tied closely to the Norlarco deal is the prospects for 16 other credit unions and two banks that bought $170 million of the Norlarco loans in participation pools. NCUA has apparently agreed to assume liability for those loans, part of the $440 million total, as part of the resolution of Norlarco, according to sources. A sale of some of the troubled loans has been pushed into 2008. (c) 2007 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com