Financial troubles spread to credit unions

With rising unemployment compounding the effect of tumbling home prices, more than a third of California's 485 federally insured credit unions lost money in the first half of this year, and three were seized by regulators.

The number of money-losing credit unions nationwide as well as in the state has surged about 75% from last year, according to the National Credit Union Administration, a federal regulator.

And with some so-called corporate credit unions -- institutions that act as backup sources of funding for the credit unions used by consumers -- having problems with mortgage-backed bonds they own, Congress passed and President Bush this month signed legislation raising the amount that a quasi-governmental entity can lend to credit unions to $41 billion from $1.5 billion.

The biggest California credit union to fail this year was Cal State 9 Credit Union of Concord, founded in 1948 by University of California employees. Its collapse contributed to a $225-million loss in July -- the biggest monthly deficit ever -- for the government-managed fund that insures deposits at most credit unions.

"The credit unions overall went into this downturn in better shape than the banks, but that doesn't mean you can't have some that get in deep trouble," said Robert B. Hoban Jr., an analyst at credit-rating firm Standard & Poor's.

Consumer credit unions generally didn't make dicey mortgages during the housing boom. Nonetheless, some are paying a price after venturing well beyond their traditional offerings -- plain-vanilla home and auto loans and credit cards -- to offer a broader array of financial services, including commercial loans.

The depositor-owned institutions, like community banks, have been pressured in recent decades as national lenders turned their core business lines -- credit cards, first mortgages and auto loans -- into mass-market commodities, reducing profits. That tempted credit unions to move into riskier areas, such as home equity lines of credit and auto loans made through used-car dealers, said Jim Wilcox, a banking professor at UC Berkeley's Haas School of Business.

"If I can't get enough yield on the same car loans I've always made, I'm going to have to reach for more," Wilcox said. "But almost always, more yield comes with higher risk."