Florida Venture Continues To Cause Losses At CUs

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FT. MYERS, Fla. - NCUA is counting the losses, expected to eventually run into the tens of millions of dollars, from three failed credit unions caught up in a land speculation scheme-gone-array here.

The three credit unions, Norlarco CU, Huron River Area FCU and New Horizons Community CU, were all taken over by NCUA after failed residential construction loans to huge developments off the Gulf of Mexico, known as Cape Coral and Lehigh Acres, near the Florida Everglades.

New Horizons Community Credit Union, once a $320-million Denver credit union, which also got caught in the failure of subprime auto lender Centrix Financial, was sold in June to Security Service Federal Credit Union after NCUA assumed as much as $100 million of the failed credit union's assets; while Ft. Collins, Colo.-based Norlarco Credit Union and Ann Arbor, Mich.-based Huron River Area Federal Credit Union continue to rack up millions of dollars in losses under NCUA conservatorship. The latter two credit unions hold an estimated $468 million in loans to residential borrowers in the two Florida developments.

NCUA was assuring members of the two surviving credit unions last week of the safety of their deposits, even as the credit unions' financial situation continues to erode.

"All member deposits are insured by the (National CU Share Insurance Fund)," said John McKechnie, spokesman for the agency.

But the credit union exposure goes much further than the three failures, as dozens of credit unions also hold participations in loan pools sold by the three credit unions.

In a case that could open a new can of worms for the wounded credit union market for participations.

Credit Union Versus Credit Union

Superior Choice CU in Superior, Wis., has filed suit in federal court seeking repayment from Norlarco of a $12.1 million participation and treble damages on the loans. Gary Elliott, president of Superior Choice, refused to comment on the dispute, saying only that the case is being litigated.

Superior Choice's loan delinquencies went from just $151,000 for the first quarter to more than $5.4 million at mid-year, according to the 5300 Call Report submitted to NCUA.

The case could raise new questions about the market for credit union participations, which is currently sorting out millions of dollars in participations made in the Centrix case. In one recent settlement, the Credit Union of Texas was forced to buy back $13 million of a $90 million participation pool of Centrix loans it had sold to Mission Federal Credit Union.

The credit unions' role in the Florida scheme only began to come to light two weeks ago when regulators in Colorado and NCUA confirmed rumors that they had taken Norlarco, Colorado's eighth-largest credit union, under conservatorship back in May.

Chris Myklebust, Colorado commissioner of financial services, said the extraordinary secrecy behind the takeover was necessary to prevent a run on the credit union.

"We're trying to save the institution. We didn't want to raise any wide concern among the members," Myklebust explained. "We're going to make sure nobody loses any money.

No one's lost a penny." NCUA's McKechnie said the federal regulator generally makes conservatorships public immediately in order to maintain member confidence, but they deferred to the state regulator in this instance because of the state charter.

The conservatorship is unusual in other ways, as well. For one thing, though the regulators removed the board of the $380-million Norlarco, as they do in all conservatorships, they did not remove the management.

Myklebust said they agreed to retain Norlarco President Robert Hamer because Hamer only came on last August after the credit union terminated the Florida program.

"We left the management in place because in my estimation they have not done anything to contribute to the situation that Norlarco finds itself in now and I want to do everything I can to instill confidence in the institution," said the state regulator.

Hamer did not return phone calls seeking comment.

A Handfull Of Lenders Involved

The three failed credit unions are among a handful of lenders that are involved in the Florida speculation that induced middle-class investors to buy property in the two developments, according to several lawsuits filed in the case and lawyers representing the investors.

Under the scheme, the investors were enrolled in a program called "Millionaire University" which purportedly taught people how to become rich from the boom in Florida land values. The "students" were brought on tours of the two developments and provided financing sources.

Enrollees in Millionaire University, who came from all over the east coast, were promised returns of 14% over the first year when they agreed to make a downpayment of $5,000 to buy a modest two-bedroom home for $214,000 that was "pre-leased," according to the court documents.

Some investors bought as many as eight homes this way, according to some of the suits, in which the investors are asking the court to prevent the lenders from foreclosing on their loans.

The credit unions' roles in the scheme, along with major lenders like Bank of America, IndyMac, Ocwan Financial and First Florida Bank, raises several questions, not the least of which includes the question of how "investors" from such far-flung places as Georgia, Massachusetts, New Jersey, New York and Alabama qualified as members of the Colorado and Michigan credit unions in order to take out construction loans.

Both the state and federal regulators said they are convinced their were no violations of field of membership requirements and the issue is not under investigation.

But the bust of the Florida land boom, which began last year, has left thousands of the houses and condominiums vacant, forcing many of the lenders to walk away.

"It's a ghost town," said one local observer of the two developments that were, in effect, new towns.

Meantime, the condition of the two credit unions under NCUA's management, Norlarco and Huron River Area, continues to deteriorate.

During the months since the May conservatorship of Norlarco real estate delinquencies have risen to more than 30%, and losses went from $3 million to $5.2 million.

And losses for Huron River Area Federal Credit Union, which has $350 million in assets when NCUA took it over in February, have risen ten-fold from the end of the first quarter to almost $60 million at mid-year.

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