PASADENA, Calif. – The spreading fallout from the depressed mortgage market continues to mount at credit unions around the country, even at those institutions with little exposure to the subprime market, forcing some hard-pressed members to default on their credit union loans.
The spillover effect is causing healthy credit unions and banks to set aside new loan loss reserves and report losses in markets that recently counted on the run-up in home values to pad personal wealth, according to Darren Williams, president of Wescom CU, which reported a $9 million loss for the third quarter. “Thousands of our members have these types of loans (with other lenders) and as the loans are repricing and payments are being reset it’s breaking the budget for them,” the president of $4 billion Wescom told The Credit Union Journal last week.
Mortgage-related woes of one kind or another have forced several large credit unions into bankruptcy in recent months and caused others to wrack up big losses, including the recent failures of Huron River Area CU and Norlarco CU, which had more than $400 million of mortgages in the deflating Florida home market. Other examples include Cal State 9 CU, which reported a $37 million third quarter loss due to its home equity program, and Allco CU, which reported almost $6 million in real estate-related losses for the first three quarters of the year.
The continued deterioration in the mortgage market will vex credit unions well into next year, according to Bill Hampel, chief economist for CUNA, who noted a rise in average delinquency ratio for credit unions to 0.82% at the end of the third quarter from 0.65% at mid-year. He predicted both the average delinquency ratio and the charge-off ratio will continue to rise next year to decade-highs of as much as 1% and 0.65%, respectively.
Hampel said anecdotal evidence is showing credit unions in what once were hot real estate markets are having the hardest times. “I’ve heard from credit unions in Florida and California,” he said. “They are saying that some of their borrowers are having trouble repaying their (other) loans. Basically, the markets of the country with the highest home price appreciation are where the members have been hardest hit.” He predicted a small number of credit unions will continue to report significant problems with their credit quality over the next few years.
Wescom’s Williams, who moved an additional $10 million to his allowance for loan loss so far this year, agreed and said he plans to add still more reserves in the fourth quarter. “It’s going to get worse before it gets better,” he said.
