FORT COLLINS, Colo. -
The decision by NCUA to end its attempt to resurrect Norlarco signals that NCUA will assume liability for some $238 million in loans the credit union has outstanding in two south Florida real estate developments, and another $183 million in similar loans made by two other credit union failures, Huron River Area FCU, in Michigan, and New Horizons Community FCU, also in Colorado.
While NCUA has sold off New Horizons and is still running Huron River Area under conservatorship, the Norlarco situation is particularly troublesome as the vast majority of the Norlarco loans, an estimated $170 million worth, have been purchased as participations by 16 CUs and two banks. Disclosure of the participations in the failed Florida projects comes after the implosion of hundreds of millions of dollars in loan participations made by credit unions in the subprime auto loan market. Dozens of CUs have been fighting each other over failed participation deals made through Centrix Financial, with millions of dollars in losses accruing.
Few Options Available
With its options few, NCUA said it was negotiating with three Colorado credit unions to acquire the remnants of Norlarco, the once $380-million credit union. Even though it has agreed to assume all of the Florida loans, many of them in default, Norlarco's capital has all been eliminated, thereby making only the largest credit unions viable merger mates.
Credit union giant, Ent FCU, based in Colorado Springs, is one of the three candidates kicking the tires at Norlarco. James Moore, a spokesman for the $2.2-billion credit union, confirmed they are among the Norlarco suitors. "We haven't finished our review of their situation," he said, suggesting a bid might be forthcoming by next week. It was unclear last week who the other suitors might be.
John McKechnie, chief spokesman at NCUA, said the deteriorating situation at Norlarco led NCUA to decide it would be best to merge the institution. "We've come to the conclusion that this was the best way to resolve this case," he said.
The financial situation at Norlarco has deteriorated over the past few months, since the regulatory takeover has become public. State regulators in Colorado took the credit union under conservatorship in May, convinced that the best way to resolve the credit union's troubles was to keep the regulatory takeover secret. But NCUA, which disagreed on the secret conservatorship, finally made the government takeover public on July 24. Since then, there has been a run on the institution, with some $52 million of savings, or 17% of the total, being withdrawn.
The situation in Huron River Area FCU, a once $320 million credit union based in Ann Arbor, Mich., has stabilized, but the credit union is also expected to be sold off by NCUA in a so-called purchase and assumption. In a P&A, NCUA sells off a credit union's healthy assets, mostly deposits and physical plant, and assumes liabilities for failed assets, like the Florida loans. Huron River Area, which lost $60 million for the first three quarters of 2007, has $170 million of south Florida real estate loans on its books. However, none of those loans have been participated to other credit unions.
The failure of New Horizons Community FCU, based in Denver, was another story, caused mostly by the $260-million credit union's involvement with subprime auto lender Centrix Financial. New Horizons did, however, have a minor exposure to the south Florida projects, about 12 loans worth $3 million.
New Horizons was sold by NCUA in a P&A to Security Service FCU in June.
The examination of New Horizons after it failed led NCUA to the Norlarco case, according to sources familiar with the situation.
The huge portfolio of loans in Florida, in the Gulf Coast communities of Cape Coral and Lehigh Acres, are expanding into a major scandal, that has so far involved dozens of lawsuits, hundreds of personal bankruptcies, the failure of the three credit unions, and allegations of involvement by major lenders, including Bank of America, Countrywide Financial, Wells Fargo, IndyMac, GMAC and Lehman Brothers, all of which made loans in the same projects. Each of those lenders is named in suits filed in U.S. District Court for the Middle District of Florida in recent weeks and months.
Buyers in the two developments allege in multiple suits that lenders conspired with other promoters on a scheme that induced them to buy pre-leased home with as little as $1,000 down that would pay a guaranteed return of 12% for the first year, until they flipped the property at substantial gain. Because they are conservators for the three involved credit unions, NCUA is a named party and is defending against those suits.
NCUA, as conservator of the credit union properties, is accruing millions of dollars in expenses to maintain the properties and pay insurance on them.
Skimishing Just Heating Up
Lawyers involved in the suits say the legal skirmishing is just heating up and many more suits are expected to be filed. "This is going to take years to unwind," said Bill McFarland, a Cape Coral attorney representing several of the plaintiffs in more than one suit.
Another suit just as onerous for credit unions was brought by one of the participating credit unions in the Norlarco loans, Superior Choice CU. The Wisconsin credit union, one of the 18 participants with Norlarco loans outstanding, claims Norlarco fraudulently sold the participations and should be required to repay its $16-million investment. Because of the Norlarco participation, Superior Choice reported s $1- million loss for the first half of this year.
More broadly, the assumption of NCUA of the $440 million of Florida loans makes it likely that the National CU Share Insurance Fund will be accruing losses on the loans. That could wipe out any retained earnings that may have been used to pay federally insured credit unions a dividend for next year.
The sale of Norlarco and expected sale of Huron River Area down the road will leave NCUA with its biggest work-out since the 1980s and early 1990s when dozens of credit unions over-extended to Texas real estate went bust and were taken over. In the biggest NCUA work-out ever, NCUA spent $85 million to resolve what was then a failed credit union known as Government Employees CU, in San Antonio. The work-out specialist NCUA hired to resolve that credit union, Jeffrey Farver, successfully saved the institution and built it into one of the most successful credit unions in the country, now known as San Antonio FCU.
Len Skiles, executive director of NCUA, ran the agency's Texas-based resolution center in those days and recalled servicing loans from that credit union for many years afterwards.
The Norlarco and Huron River Area failures raise several questions among credit union supporters and detractors. Several bankers have wondered why credit unions in Colorado and Michigan were making loans in far-flung places where they had no field of membership.
Like the Centrix Financial case before it, the situation raises red flags about the multi-billion dollar credit union market for loan participations.
Raising Questions About CU Investments
And it also raises questions about whether some credit unions are getting involved in investments that they shouldn't be.
"The unfortunate situation at Norlarco Credit Union underscores the absolute necessity of credit unions to perform the highest degree of due diligence in all investment decisions," said Skiles. "NCUA encourages careful assessment of risk and prudent management of balance sheets, and will continue to take every opportunity to promote greater awareness by credit unions as they evaluate their options in a complex and rapidly-changing marketplace. Simply put, credit unions must employ all available methods to ensure safe and sound operations."
