ALEXANDRIA, Va. -
Credit unions around the country are reporting some of the biggest losses since the height of the last major real estate bust, in the early 1990s, when dozens of credit unions went bust.
The reasons vary, but one thing is clear, the mortgage crisis that began in the subprime market and spread to major lenders is now hurting credit unions, as well.
"I've heard from credit unions in Florida and California and they are seeing some of their borrowers have trouble repaying their loans," said Bill Hampel, chief economist for CUNA.
"Basically, the markets in the country with the highest home appreciation, are being hit the hardest," said the credit union economist.
Credit union giant Wescom CU is one. The $3.8-billion Pasadena, Calif., credit union reported a $9-million loss for the third quarter as it set aside increasing funds to cover loan losses.
Darren Williams, CEO of Wescom, said many of his members are being affected by adjustable-rate mortgages with high-rate loans taken out with other lenders and that is crimping their ability to repay loans with the CU. "Thousands of our members have these types of loans, and as the loans are repricing, and as payments are being reset it's breaking the budget for them," William said. "It's absolutely spilling over into the consumer segment."
So the CU giant moved an additional $10 million to its allowance for loan losses in the third quarter and will move even more to the loan loss reserve in the fourth quarter. "It's going to get worse before it gets better," the Wescom CEO said.
CUNA's Hampel agreed, citing a rise in loan delinquencies in the third quarter. He blamed the increase, from an industry average of 0.65% at mid-year to 0.82% at the end of the third quarter, to the spreading effects of the mortgage crisis.
"A small number of credit unions will see significant problems with credit quality over the next few years, largely as a fall-out of the credit problems in the overall market," Hampel said. He predicted a rise in the industry's delinquency ratio to as much as 1% next year and in the charge-off ratio to 0.65%, levels not seen for a decade or more.
As many as a dozen California CUs reported third quarter losses of $1 million or more, with the biggest loser in the period being Cal State 9 CU. The $39-million credit union, which was taken over by regulators last month, reported third quarter losses of $36.8 million, and three quarter losses of $45.9 million, most of it due to a failed home equity lending program tied to the once-soaring home appreciation prices in its California market.
To be clear, some credit unions are reporting losses because of expenses tied to expansion plans, which have to be reported through the income statement. Xerox FCU, in El Segundo, Calif., for example, reported a $1 million third quarter loss related to the costs of a doubling of its branch network and moving to a new headquarters.
E1 Financial CU, in Monterey Park, Calif., reported a $900,000 third quarter loss, also due to expansion costs, according to CEO Lynn Bowers. The $365-million CU has been converting from a single sponsor to a community charter for the past few years. "We're basically spending money to become a community credit union and we're bringing on new staff and opening new branches," she explained.
Dozens of the third quarter's biggest losers are tied to two major credit union blunders. Those were the widespread entry in subprime auto lending and the misadventures in south Florida, where the now-failed credit unions sold off millions of dollars in loan participations to dozens of other credit unions.
NCUA has taken over the three failures-New Horizons Community FCU, Huron River Area CU (see related story) and Norlarco CU-and has assumed more than $400 million in troubled real estate loans the three originated in the south Florida developments of Cape Coral and Lehigh Acres.
But the regulatory action won't stem the red ink flooding into some of their credit union partners, with 16 credit unions holding $170 million in Norlarco participations, and dozens more holding participations from Norlarco's auto loan participation program. The CEO of one Florida credit union attributed their $270,000 third quarter loss to the "millions of dollars" in Norlarco auto loan participations his CU is holding.
Many of the losers, like Credit Union of Texas, which reported a $2.4-million third quarter loss, were participants in the ill-fated subprime program run by Centrix Financial. The Dallas credit union, which reported year-to-date losses of almost $8 million, was one of the biggest partners with Centrix, which filed for bankruptcy last year and has caused hundreds of millions of losses to credit unions around the country. Officials with the $1.2-billion credit union did not return phone calls seeking comment.
But the subprime auto loan fall-out was not limited to Centrix participants.
Bay Gulf CU, a $200-million credit union based in Tampa, Fla., has terminated its two-year-old first-time auto buyers program, which it ran on its own, after wracking up big losses. The credit union had poor underwriting, with most of the loans being made at 120% to 125% loan-to-value ratio, according to William Demare, president of Bay Gulf. "We weren't as diligent as we should have been with underwriting procedures," he said.
With high delinquencies, Bay Gulf reported a third quarter loss of $608,000 and almost $1 million for the year-to-date. "Believe it or not, people are just driving it in and dropping off the keys," he said.
Traditions FCU, a Toccoa, Ga., reported a $1.6- million third quarter loss related to its failed subprime auto loan program after it introduced a risk-based lending program. But growing job losses in the textile industry hurt many of its members' ability to repay their loans, according to David Miller, president of the $44-million CU. He plans to move more funds to loan loss reserves for the fourth quarter to cover additional defaults. "We're trying to get it all over with this year," he said.
For tiny Tri-Linc FCU, a Bound Brook, N.J., credit union that serves the Teamsters union and other select groups, the $1.2-million loss in the third quarter erased all of its capital and was too deep of a hole to climb out of, according to Eddie Daniels, president of the $12-million credit union. They plan to merge into nearby FAA Eastern Region FCU the first part of next year, he said.
That is the route being taken by many of the biggest third-quarter losers.
They include: Huron River Area CU, $60 million three quarter losses; Norlarco CU, $2.9 million third quarter loss; Peoples First Choice FCU, $3.4 million three quarter losses; Excelsior CU, $2 million third-quarter loss; Green Tree FCU, $1.9 million three quarter losses and Golden Bay CU, $760,000 three quarter losses. (c) 2007 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com
