WesCorp's management didn't manage risk well and invested too heavily in residential mortgage-backed securities, while NCUA examiners failed to "adequately and aggressively," address the risks.
That's the finding of the material-loss review conducted by the NCUA Office of Inspector General. The NCUA placed WesCorp into conservatorship in March 2009. The loss to the Temporary Corporate Credit Union Stabilization Fund is estimated to be about $5.59 billion.
"Management's actions allowed a substantial investment portfolio of privately issued RMBS, resulting in a significant concentration risk, and left WesCorp increasingly vulnerable to significant credit risk, market risk, and liquidity risk through the portfolio's exposure to economic conditions in the residential real estate sector," the report concluded.
The report also faulted WesCorp executives for investing too heavily in RMBS issued by Countrywide Home Loan Inc. In June 2007, Countrywide was the servicer for more than 220% of the underlying mortgage collateral in WesCorp's investment portfolio.
"We believe that in having such a significant concentration of RMBS originated, issued and serviced by a single financial institution WesCorp exposed its own balance sheet to the economic viability of that single entity as a business enterprise, including the pressures that a company may face to remain afloat in changing economic environments," according to the report.
The report said NCUA examiners did not "critique or respond in a timely manner" to the credit union's increased concentration in RMBS. However, the report said this failure was in part the result of NCUA regulations that weren't strong enough. The examiners "lacked the regulatory leverage" needed to force WesCorp to make changes that might have prevented the need for the NCUA to conserve it.
During the agency's examinations from 2003 to 2008, examiners noticed increased risk concentration but "did not criticize or take action" until 2008.
The report also said that it was "concerning" that even though the NCUA warned credit unions about the risks of mortgage-backed securities in 2005 and 2006, WesCorp continued to invest heavily in them.
As of December 2008, 60% of WesCorps's $22.7 billion RMBS portfolio was made up of subprime and alt-A mortgages "underwritten with risky loan terms and characteristics," according to the report.
In September, the NCUA issued a rule on corporate credit unions that strengthened regulations, including instituting strict limits on risk concentration.
NCUA Executive Director David Marquis said the rules approved by the agency in September prevent the purchase of privately held RMBS and also establish a new capital structure.
Marquis said that although many of the RMBS that WesCorp purchased were rated AAA or AA, NCUA officials and others warned that the ratings were not a substitute for appropriate due diligence by credit union officials.
In March 2009 in related news, the NCUA also conserved U.S. Central Corporate FCU and that has cost the NCUSIF and TCCUSF $1.45 billion as of June 30. The agency liquidated U.S. Central on Oct. 1.
On Nov. 19, the NCUA turned over 750,000 pages of documents about its handling of U.S. Central Corporate Credit Union to Corporate America Credit Union, which is suing former directors and executives of U.S. Central. As a result, Corporate America CU dropped its lawsuit against the NCUA.
"They have begun the production of the documents we requested, so the suit has been withdrawn," Corporate America Credit Union President/CEO Thomas D. Bonds told Credit Union Times.
Corporate America CU, which is headquartered in Birmingham, Ala., filed the lawsuit against former U.S. Central FCU directors and officers, alleging state and federal securities violations. As part of the discovery process, Corporate America had requested documents from the NCUA. Previously, the agency produced some documents but not all, according to the filing last week by Corporate America in federal District Court for the Northern District of Alabama.
Bonds said the discovery process in the suit against former U.S. Central board members and executives is proceeding and "both sides are more aware of what happened."