Wescom Credit Union of Pasadena, Calif., plans to join the small but growing number of credit unions offering commercial real estate loans to members.
Bankers, predictably, do not welcome the competition.
Wescom will concentrate on apartment buildings, "a natural extension of the loans we already make," said Cathy Duggan, its senior vice president of lending.
It has long offered loans to members on 1-to-4-unit investment properties, she said, and for many years some who own larger apartment buildings have sought its financing for them.
Wescom members live or work in five southern California counties. It was the 18th-largest credit union at yearend, has more than $2.5 billion of assets, and funded about $475 million of residential mortgages last year.
Ms. Duggan said it plans to hold and service the commercial mortgages it originates. They will diversify its credit exposure and, because their duration is shorter and more predictable than single-family mortgages, reduce its interest rate risk.
"Over all, it's good for the membership if we have a more diversified loan portfolio," she said.
Wescom will fund loans as large as $5 million. Because it has set no minimum, members will be able to use the loans for rentals with as few as five to eight units. These are hard to finance, because lenders generally avoid small loans, which take nearly as much work as big ones.
Besides multifamily, Wescom will also finance industrial, retail, and office properties, it said in an April 8 press release announcing the plan. Ms. Duggan said it will focus on its five-county territory and has "no plans to do any loans out of state."
So far it has only one employee for commercial real estate: Dean Lambertson, a 20-year industry veteran who was a vice president at First Regional Bank of Los Angeles and developed its regional commercial real estate group. Wescom hired Mr. Lambertson as a consultant late last year and has since put him on staff.
The credit union hopes to begin funding commercial realty loans this quarter, he said, but "it's difficult to gauge" how much it will do, though members have shown interest individually and in polls.
Mr. Lambertson said he expects to have one or two more people helping him with processing and closing by yearend. "I don't see the staff getting very large," he said.
The credit union focus on service instead of profits attracted him to the job, he said. "It makes the work interesting and more fun." A credit union is "not an assembly-line operation."
About 17% of federally insured credit unions did some type of nonconsumer lending last year, according to the National Association of Federal Credit Unions, but at yearend only 2% of their outstanding loans were business loans.
Fred Becker Jr., the group's CEO, said such lending targets underserved areas.
Bill Hampel, the chief economist for the Credit Union National Association, said most of this lending seems to be for apartment buildings. "Most consumers are not in the business of running a business, but they might buy some property and rent it out," he said.
Another reason credit unions got into commercial real estate lending is that the National Credit Union Administration used to require that any nonconsumer lending they did be secured, Mr. Hampel said. (The requirement was dropped in October.) Yet another was the similarity between commercial mortgages and residential mortgages, with which they have lots of experience.
Keith Leggett, an economist for the American Bankers Association said credit unions' taking up commercial real estate lending is "another source of irritation."
Banks have a hard time beating credit unions on price or on terms, Mr. Leggett said.
Craig Litchfield, the CEO of Citizen and Northern Bank in Wellsboro, Pa., gave an example.
Last year, he said, his bank was negotiating with a investor who wanted to borrow $2 million to buy a Tioga County shopping mall. The mall was anchored by a supermarket that was part of a chain that had filed for bankruptcy protection, so Citizen asked for a loan covenant that would protect it if the store closed.
But Visions Federal Credit Union of Endicott, N.Y., offered the loan at a lower rate and without the covenant, Mr. Litchfield said. The supermarket later moved out.
(A phone call to Visions, whose members live in five New York and Pennsylvania counties, was not returned by press time.)
Losing the deal was not a big blow, Mr. Litchfield said, but the combination of tax advantages and inexperience at the credit union are dangerous to the market, he said.
However, Ms. Duggan of Wescom stressed Mr. Lambertson's experience - and the demand for the lending he will do. The credit union is "just trying to meet the needs of our members," she said.
Mr. Becker of the trade group said the $5 million ceiling will mostly limit Wescom to community projects. "I don't know what $5 million buys in L.A., but it's not a lot," he said. "This isn't Mall of America."
