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Fallout from a bank failure

An East Coast corporation that took over Bank of Clark County loans has played hardball with local borrowers

By Cami Joner
Published: January 16, 2011, 12:00am
8 Photos
Regulators swarm into the Bank of Clark County on Jan.
Regulators swarm into the Bank of Clark County on Jan. 16, 2009, to close the institution and secure its assets. Photo Gallery

Lynn Wiley had traveled 2,900 miles in a bid to save his Clark County homebuilding business.

Now he fretted. Would the company that was now collecting on his Bank of Clark County loan accept his plan to pay off his $3 million debt? Or would this conversation end unresolved, like so many others?

He knew within minutes of reaching Rialto Capital’s Manhattan offices that his worries were justified.

The two men across the conference-room table did not want to negotiate. Instead, Wiley felt, Rialto wanted to take his property, his business and everything he owned.

Today is the two-year anniversary of the Bank of Clark County’s failure. But for Wiley and dozens of people like him, the ordeal that began on Jan. 16, 2009, is far from over.

Unfamiliar game

When the Bank of Clark County closed, borrowers such as Wiley found themselves playing an unfamiliar game.

The bank had been a softball lender, issuing loans to dozens of local property developers even as it became clear that real estate prices were cooling. When their short-term construction loans came due, they knew they could quickly refinance.

At first, the FDIC stepped in. Though more stringent than the Bank of Clark County, it allowed some of the bank’s customers to rework their loans. Then Rialto Capital took over. Rialto played hardball. When borrowers ran into trouble and asked for a reprieve, Rialto didn’t negotiate. It foreclosed.

A Columbian review of 160 Bank of Clark County loans found that many borrowers were able to move on, including a small nonprofit organization that had to lay off two employees when its Bank of Clark County credit line was frozen and a millionaire who paid off his loan as quickly as he could.

Builders such as Wiley, who owed more than his land was now worth, did not have that option.

They had to pay off their debts or risk losing everything.

And because Rialto Capital is owned by one of the nation’s largest homebuilders, the Bank of Clark County’s death could have consequences that stretch beyond its former borrowers.

If Rialto’s parent company ultimately builds on land it acquires through foreclosures, an East Coast corporation may have a hand in shaping Clark County’s future growth and development.

“This is an example of how the feds failed us by cherry-picking winners and losers,” said Clark County Commissioner Steve Stuart.

All because of choices made by the FDIC.

‘Multibank’ loans

Though the government has shuttered 321 banks since mid-2008, its regulators were still rusty at that dismal task on Jan. 16, 2009. When Umpqua Bank opened its doors in Bank of Clark County’s two former branches on Jan. 20, tellers could answer customer questions about checking and savings accounts. But they had no say in the fate of former Bank of Clark County loans.

Instead, the FDIC took over, then gradually bundled loans and auctioned them off, often in pools that included loans from other banks. Rialto paid $244 million for the right to collect on loans bundled under the name “Multibank,” including many the Bank of Clark County had made.

Borrowers found the process dizzying — and often damaging, Wiley said.

Kirk Wardius of Ridgefield had borrowed from the Bank of Clark County to fund a $2.06 million commercial building in Clackamas, Ore.. The bank had agreed to convert his short-term construction financing to a long-term loan once construction was complete.

When the bank went under just as the project was finished, Wardius found a new lender and tried to strike a deal with FDIC. The FDIC seemed willing to accept his refinancing proposal, Wardius said. But then “they went silent,” he said. Soon after, his loan was sold to Rialto Capital. His attorneys entered the negotiations but could not agree to a refinancing plan with Rialto.

He eventually decided to place the project in Chapter 11 bankruptcy in the hopes of working out an acceptable loan repayment plan.

“This has completely turned my life upside down,” he said. “The biggest thing I’ve been able to recognize is that when I talk to my peers, they know where I was three years ago and they know where I am now. They open their eyes and say ‘That could have happened to me.’”

Later, the FDIC would develop systems that smoothed the process.

By the time Bay Bank was closed on July 30, 2010, nearly all of its borrowers were able to come in to acquirer Heritage Bank the following Monday to ask questions about their loans.

But those lessons came too late for Bank of Clark County customers.

Devastating to many

Viewed from a distance, it’s hard to fault the FDIC for its bundle-and-sell approach. The federal agency’s mandate is to keep the banking system healthy and to recover as much money as it can when a bank fails. It’s not equipped to negotiate with hundreds or thousands of borrowers. Selling the Bank of Clark County’s loans quickly raised millions that could go to customers who lost savings and checking deposits when it failed. It also freed regulators from the hassles of loan negotiations.

But from the ground in Clark County, these actions have been devastating to many.

It was confusing enough that FDIC sold Bank of Clark County loans. That Rialto Capital was the high bidder in two of these auctions seemed to many borrowers to add insult to injury.

That’s because Rialto is owned by one of the nation’s largest homebuilders, Florida-based Lennar Corp.

Every time that Rialto forecloses on a builder such as Wardius, Lennar extends its reach. Rialto’s work could help Lennar control thousands of already-platted Clark County housing sites, setting it up to build or sell when the market returns.

Industry experts call Rialto a “value add” for Lennar. Stuart Miller, Lennar’s president and chief executive officer, called it “a growing pipeline of opportunity” in a conference call to investors last week.

Local leaders, however, say the FDIC’s arrangement resulted in a huge loss for the community’s home-grown builders.

“Aside from the personal and professional tragedies in the downfall of the Bank of Clark County … we would much rather have personal and local control over the destiny of those properties,” said Vancouver Mayor Tim Leavitt.

“My question is, who was the FDIC looking out for?” Stuart, the county commissioner, asked. “Were they looking out for the community?

No, believes Steve Madsen, a local attorney and part-time lobbyist for the Clark County Building Industry Association. The county builders’ trade group has dropped to 800 members, down from 1,030 in 2008.

The FDIC can’t be blamed for a national housing market collapse that has hit Clark County especially hard. But government actions have made a bad situation worse, Madsen said.

“They sold (the loans) to vultures and vampires from back East that are going to come in and suck every dime out of these developers at the expense of the local real estate and development communities,” Madsen said.

FDIC officials said that they still play a role in overseeing Rialto’s management of the loan portfolio. “The FDIC is not just wiping their hands clean. We are heavily involved in the monitoring of these loans,” said Richard Salmon, with the FDIC’s division of resolutions and receiverships in Dallas.

Though it’s too late for Clark County, the FDIC also appears to have changed its ways. When community banks fail, the acquiring bank now takes over nearly all loans in most cases. Borrowers don’t need to negotiate with regulators or wait for loan auctions to find out their fates.

U.S. Sen. Maria Cantwell, D-Wash., recently met with about two dozen local builders who hold loans from the former Bank of Clark County. Cantwell, a member of the Senate Finance Committee and the Committee on Small Business and Entrepreneurship, vowed to focus on legislation to avert a similar situation in the future.

But these changes are too late for Clark County, or for the dozens of borrowers who have butted heads with Rialto.

Lynn Wiley’s given up on saving his 45-lot Vancouver subdivision. His property heads to the auction block on March 4.

“The frustrating thing is, if we were working with a bank, we know we could have worked something out,” he said.

o o o

A TRAIL OF HARD FEELINGS

Today marks the two-year anniversary of the Bank of Clark County’s failure. Its seizure by state and federal regulators left a wide range of people unable to refinance loans or draw on lines of credit.

When their loans wound up in the hands of East Coast investment firms, it was chilling for some and a minor nuisance for others among 161 troubled borrowers identified by The Columbian in an examination of property records. Among the commercial property owners, homeowners and nonprofit organizations willing to share their stories, some found new financing or sold their properties to pay back the loans. Others are still desperately trying to negotiate a way out of their loans, which were grouped together and auctioned in profit-sharing deals brokered by the Federal Deposit Insurance Corp.

The arrangement gives the loans’ buyers — companies such as Rialto Capital, a subsidiary of mega homebuilder Lennar Corp. — a chance to keep 40 percent of each dollar it recovers.

Here is an update on some of the people, groups and businesses who had outstanding loans on the day the bank failed.

AFFORDABLE COMMUNITY ENVIRONMENTS

o Housing development manager: Leah Greenwood.

o Project: Several affordable-housing developments in Vancouver.

o Loan amount: $31,000.

o What happened: The nonprofit organization had taken out a line of credit and received a temporary loan extension when the FDIC shuttered the bank and froze Affordable Community Environments’ credit line. Later, Rialto took over the loan. Without the line of credit, two employees had to be laid off. ACE leaders said they found efforts to negotiate with Rialto frustrating. The nonprofit eventually found local financing and paid off its small loan.

o Outcome: Issue resolved.

o Quote: “The new entity that held the loan was really pretty disorganized in working with borrowers,” Leah Greenwood said. “We said, this is ridiculous, we’re paying it off.”

ED LYNCH, VANCOUVER BUSINESSMAN AND PHILANTHROPIST

o Project: Lynch’s personal Vancouver home.

o Loan amount: $2 million.

o What happened: To preserve cash, Lynch secured a mortgage from the Bank of Clark County for his upscale Vancouver home. The loan became due immediately upon the bank’s failure, causing Lynch to look for other financing, which he eventually arranged.

o Outcome: Issue resolved.

o Quote: “The goofball in all this is the FDIC, because they took these loans and sold them. To me, they were the ruthless ones.”

ME DEVELOPMENT LLC

o Manager: John Fazzolari.

o Project: A portion of the 71-lot Messner Estates residential subdivision in the Felida area.

o Address: Northwest 122nd Street and 42nd Avenue in Vancouver.

o Loan amount: Approximately $2.25 million.

o What happened: Subdivision developer Fazzolari had 25 vacant housing lots remaining in the subdivision when his loan was sold to Rialto Capital in February. He contacted Rialto and submitted a loan workout proposal in June. He heard back from Rialto in July and again in December, but Fazzolari said the company refused to negotiate terms when he would not sign a pre-negotiation contract. Rialto declined to comment.

o Outcome: Unresolved.

o Quote: “Some of the provisions in this contract require me to comply by the laws of the state of Florida, and there is no way. The contract we sign will be here in the state of Washington. That’s what we agreed to up front, and that’s what we’ll agree to now,” Fazzolari said.

HIDDEN BROTHERS

o Principals: Monte Hidden, Oliver Hidden and Bill Hidden.

o Project: A 100-lot residential subdivision in an early stage of development, with some engineering work done.

o Address: North of Northeast 78th Street off 30th Avenue.

o Loan amount: Approximately $1 million.

o What happened: These longtime Vancouver land developers had to scramble to find alternative financing when the bank shut down and other banks were not loaning for commercial projects. Eight months after the bank closure, the Hidden Brothers found new financing through Pacific Continental Bank, but the Hiddens had to put up more to finance the same amount.

o Outcome: Resolved. The company postponed plans to build the subdivision.

o Quote: “It was terrible. We were scrambling to find another replacement loan and we were under the gun. It was not fun,” said Monte Hidden.

WARK ENTERPRISES, WARK DEVELOPMENT, SCOTT COMBS DEVELOPMENT

o Managers: Bruce Wark, Scott Combs.

o Project: Adjacent residential subdivisions of 46 acres on Northeast 107th Street west of 117th Avenue.

o Address: Battle Ground.

o Loan amount: County records show $4.7 million to Wark and $5.8 million to Combs.

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o What happened: In March 2010, the two men and their development firms filed a lawsuit in U.S. District Court against the FDIC and Multibank, the name of the joint venture between FDIC and Rialto Capital. The suit claims that the Bank of Clark County and its successors, FDIC and its Multibank joint venture, breached the original loan contracts. The lawsuit asks for arbitration of damages caused by contract breaches.

o Outcome: The case is scheduled to go to trial at U.S. District Court in Tacoma this spring.

o Quote: Combs said he and Wark would not comment, on the advice of their attorneys.

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