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Homebuilders hammered over debt

A more-aggressive FDIC sues prominent developers who borrowed from Bank of Clark County

By Libby Clark
Published: September 19, 2010, 12:00am

When the Bank of Clark County failed almost two years ago, many of its borrowers feared the worst — that their loans would be sold to outside investors and targeted for immediate collection. For at least three of Vancouver’s prominent developers, that scenario has become reality.

The Federal Deposit Insurance Corp. and its private partner last month filed lawsuits in Clark County Superior Court against developers Corey Harris, Sam Vilhauer and Ian McFatridge after they couldn’t pay off their commercial real estate loans originally held by BOCC.

The land behind these loans is now worth far less than the FDIC and its partner, Multibank 2009-1 RES-ADC Venture LLC, could make by foreclosing and then selling the property. So they’ve sued, seeking $6.9 million in remaining debt that they are legally entitled to as the new owners of the loans.

These two lawsuits — one against Harris, the other against Vilhauer and McFatridge — represent a more aggressive approach than the FDIC has taken with other loans from failed banks, including some that Harris was involved in.

Vancouver bankruptcy attorney Doug Whitlock has seen a dramatic increase in similar lawsuits by debtholders. It’s a tactic that often doesn’t justify the cost, because of the high cost of litigation and the low recovery rate, he said.

“And the other fallout is, I’m not going to say it ruins people’s lives, but it puts them in a far worse position for no real gain.”

Nothing to collect

The recent lawsuit by Multibank is the last big blow to Harris’ former business, which he operated under his own name. He’s spent the past few years settling nearly $70 million in liabilities with other local banks after the real estate crash took away most of his equity. Through non-judicial foreclosures, short sales and other means, he turned over the properties and settled the debt with his creditors — which included the FDIC.

The FDIC, however, was unwilling to negotiate in this case. Harris had borrowed $2.5 million from the Bank of Clark County to buy three properties, including scenic Evergreen Pointe overlooking the Columbia River on Southeast Lieser Point Road. He expected to turn a profit developing and selling the properties to home builders until the housing market crash made the properties worth less than he had paid for them.

Soon after the bank’s January 2009 failure, buyers who were willing to pay of a portion of Harris’ debt to the bank came forward. But the FDIC now owned that loan and it would not approve the short sale, Harris said. Instead, the federal agency sold the loan to Multibank.

The FDIC took over the failed Bank of Clark County’s loans and has auctioned the majority off to banks and private investors.

Instead of selling some loans outright, however, the FDIC entered into partnerships with private businesses that took charge of collecting as much as they could. Under these agreements, the FDIC shares as much as 70 percent of the profits made from the collection.

Multibank is one such partner. It bought loans from the FDIC and agreed to split the proceeds after collection.

These agreements have been heralded as a win for taxpayers because the federal agency can benefit financially without overseeing the collection and administration of the loans. Loan sales to partners like Multibank also minimize the losses to the Federal Deposit Insurance Fund and help ensure that BOCC depositors who held amounts in excess of the $250,000 FDIC-insured limit will eventually recover their money.

But when FDIC’s partner loan holders sue to collect, they may force businesses to close and harm the credit of developers.

‘Right thing to do?’

The lawsuit from Multibank marks the first time any of Harris’ lenders went after him personally to pay outstanding debts, Harris said. “Just because they legally can do something, is that the right thing to do?”

Multibank filed a suit against Harris seeking the $2.5 million due plus interest, late charges and attorneys fees. The collector dropped the lawsuit two weeks later after discovering Harris no longer has the resources to cover that debt.

Neither attorneys for the FDIC or Multibank returned calls seeking comment.

The FDIC filed a similar lawsuit against Vilhauer and McFatridge and their company, VMW Development, to collect $3.8 million, plus interest and attorneys fees.

The developers had originally taken out a $2.79 million loan in 2005 to buy and develop the Park West subdivision, comprising 24 homes on 11.73 acres at Northwest 127th Street in Vancouver. The Bank of Clark County modified the loan five times in three years, ultimately increasing it to $4.5 million. A second loan for $500,000 was signed in April 2008.

After the FDIC became receiver of the loans, the developers defaulted on the payments. The FDIC foreclosed on the property and sold it last spring for $1.6 million. The agency is suing to collect the rest.

The developers both declined to comment while their case is still under litigation.

Both cases represent what many Clark County borrowers most feared when the Bank of Clark County was seized. Outside investors, removed from the community, treat the properties strictly as profit vehicles. Unlike local bankers, who see and experience the economic fallout of local bankruptcies and foreclosures, outside investors can collect on debts with little personal risk and much gain.

“It’s like we’re getting penalized for the bank failing and then the FDIC coming in,” Harris said. “I understood the charter of the FDIC to encompass the liquidation of assets. I get that. But how (does) denying a short sale, which would have clearly benefitted the shareholders of the Bank of Clark County, in favor of selling the loans for pennies on the dollar accomplish that? And where is the remedy for the borrower to recover his lost equity?”

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