FT. MYERS, Fla. - Foreclosures in two local real estate developments continued to soar last month, complicating the resolution of three failed credit unions, as well dozens more that participated in loan pools related to the projects.
Mortgage foreclosures surged 18% for August, to 1,232, in Lee County, home to the Cape Coral and Lehigh Acres developments that have landed three credit unions–Norlarco CU, Huron River FCU and New Horizons Community FCU–in conservatorship. NCUA, because it took the three credit unions over, is on the hook for as much as $500 million of loans the three made to investors in the two developments, and is monitoring more than $150 million in participations owned by as many as 30 credit unions.
One of the credit unions, New Horizons Community, has been sold, but only after NCUA assumed millions of dollars in failed loans to the projects.
NCUA officials declined last week to predict how the mounting losses may affect the National CU Share Insurance Fund, but conceded the impact could be significant. "We believe it's too early to speculate, but we are watching the situation closely," said John McKechnie, spokesman for the agency.
Sale Of Distressed Loans Considered
NCUA is said to be considering a package sale of the distressed loans, but the market for distressed real estate loans is the worst for sellers in many years because of the meltdown in the subprime mortgage market.
Observers believe the unwinding participation deals hold potential for the greater losses for Norlarco, which reported a $5 million loss for the second quarter of the year, and other credit unions. William Sterner, president of Elevations CU, in Boulder, Colo., said his credit union considered merging in 2005 with Norlarco, based in nearby Ft. Collins, Colo., but backed off after realizing the exposure Norlarco had to the Florida developments. At that time, more than 30 credit unions and two regional banks had bought participations in pools of Norlarco construction loans in Florida. "It was fairly extensive," said Sterner, who also serves as chairman of the Colorado CU Association. One of those credit unions, Superior Choice CU, in Wisconsin, has filed suit in federal court to recover a $12.1 million participation it purchased from Norlarco. Both Huron River Area and New Horizons Community are also believed to have sold participations in the Florida loan pools to other credit unions.
Borrowers from both Norlarco CU and Huron River Area Community FCU have filed suits claiming they were duped into borrowing funds to buy new "pre-leased" homes in the two Florida developments for which they were promised returns of 14% for a year.
A new suit filed in federal court in Florida makes similar claims against New Horizons Community FCU and sheds more light on the scheme, which was sold to low- and moderate-income people under a program called "Millionaire University."
In the suit, filed in U.S. District Court for the Middle District of Florida, Kinnith and Deborah Norris claim they made a downpayment of just $4,000 to borrow $835,000 in construction loans for four "pre-leased" homes through First Homes Builders, which were then converted to permanent financing by New Horizons Community FCU. For a $1,000 downpayment, the Norrises were provided a $210,000 loan to build a three-bedroom house that would be occupied for a year, then sold for a guaranteed 14% return.
Properties Lie Vacant
Like thousands of other investors in Cape Coral and Lehigh Acres, the Norrises are in default on their loans because all of the properties lie vacant.
NCUA, acting as liquidating agent for New Horizons Community FCU, filed a motion with the court to dismiss the case, arguing that the investors failed to exhaust their administrative remedies by appealing their case to NCUA before the courts.
The regulators said they believe that hundreds of investors in the speculative Florida real estate qualified for membership in at least one of three failed credit unions by joining unaffiliated non-profits that served as select groups. Some of the investors were able to join Norlarco CU by paying a nominal membership fees to Rocky Mountain Bird Observatory, Boy and Girls Club of Larimer County or Legacy Land Trust, according to Chris Myklebust, commissioner of the Colorado Department of Financial Services.
Investors Filing Suit
Hundreds of the investors, from as far away as Massachusetts, New York, New Jersey, Georgia and Maryland, have filed suit alleging fraud in the sale of the Florida Gulf Coast properties, Cape Coral and Lehigh Acres.
The Colorado regulator said he is concerned about the status of Norlarco CU after the news media got wind of the secret three-month conservatorship, saying that members have accelerated withdrawals since then. The then-$380 million credit union was secretly taken over in May, in order to retain member confidence, but only became public two weeks ago. "It was business as usual up until about a week ago, when the news media got wind of it," said Myklebust, falling short of calling the member withdrawals a "run" on the credit union.
Sterner said his $750-million credit union, formerly known as University of Colorado FCU, "kicked the tires" at Norlarco in 2005 to consider a merger, but backed off when the extent of the Florida borrowings were revealed. "It was a natural for us," he said. "Our fields of membership are similar. They're big in the community. We both serve college campuses."
