"Cal State 9 has total assets of nearly $388 million and over 29,000 members. The credit union, however, had impaired capital and had become insolvent," said Carol D. Chesbrough, interim commissioner of financial institutions for the state DFI. Assuring members of the safety of their deposits was a primary concern, with the NCUA's announcement stating, "Member funds are federally insured up to at least $100,000 per account by the National Credit Union Share Insurance Fund (NCUSIF), a federal fund managed by NCUA and backed by the full faith and credit of the U.S. Government." Members with questions about their insurance coverage were advised to call the NCUA's Region V Division of Insurance at 602-302-6000 Monday through Friday during business hours. NCUA said it was looking for a merger partner or a bidder for Cal State 9 while it continues to operate the credit union.

Cal State 9 CU's 5300 report shows that there is $36.5 million in uninsured deposits. How much of that amount is member deposits and what amounts are broker deposits or Central Liquidity Funds is unknown, as the report doesn't break them out specifically. In a conservatorship some members will withdraw funds. If members have deposits above the insured level of $100,000 there is always a risk of losing anything above that amount. The NCUA letter is an attempt to assuage members' feelings of risk and perhaps stem a possible flood of money from the institution. But the idea of informing members with deposits over $100,000 remains a murky ethical question in the CU world. Some credit union CEOs have questioned the responsibility of the conservator to vulnerable depositor/members versus potential losses to the NCUSIF.

Cal State had been scrambling to rewrite and workout delinquent HELOC loans during the past three months, but it is unknown how many delinquent borrowers were brought "current" due to a rewrite or workout. Several CU veteran sources indicate that workouts are often only a short-term fix, as about half of reworked loans revert to delinquent status again within 12-months. Despite the efforts, it proved too little and far too late to save Cal State 9.

Wong Gone?

CEO Jackie Wong, who had been rumored several times to be on the way out the door now unceremoniously follows the CU's former Chief Financial Officer Richard Headrick, the architect of Cal State's gamble on outsourced HELOC loans. Headrick left the CU sometime in October. He had been with Cal State 9 for over four years and was the mastermind of the CU's HELOC program. Credit Union Times was unable to contact either one for comment.

Headrick was reportedly compensated richly through bonuses (in addition to salary) for helping to create high loan volume while the real estate bubble was expanding. But the CU continued to make loans even as the air was coming out. But blaming the losses on the overall housing market slump is a bit of a stretch. Given that Cal State's portfolio was so heavily invested in an outsourced HELOC program, questions surrounding the decision to keep making loans was of questionable judgment. That judgment was negated in September when the state DFI issued a cease-and-desist order and it came to an abrupt halt. Contents of the order have been kept confidential. The dismissal of the board is ultimately a condemnation of its oversight and fiduciary responsibility to set and maintain sound lending principles.

In Cal State's member newsletter dated March 2007, the Financial Educator, CEO Wong and Chairman of the Board John DeClercq boasted of "Helping home Buyers" and "exceeding goals." They wrote, "Our loans grew a record 48% during the past year. More and more of our members continued to look to us for their mortgage needs, as the credit union funded a record $266 million in home equity loans to over 3,200 homeowners during 2006." They failed to mention that many of those loans were not made to existing members, but rather created through an outsourced relationship.

Judy Hurst has been named interim CEO. Hurst was CEO of UNOCAL Credit Union for almost seven years, when it was merged with Wescom Credit Union. UNOCAL was near the $100 million-asset range, much smaller than Cal State. Hurst is not known to be a real estate workout specialist, which gives rise to the possibility that a merger may be a preferable course to pursue. But given the heavy losses and potential losses that still remain, a purchase and acquisition seems to be the more likely scenario.

Contacted by Credit Union Times, John DeClercq declined to comment on the Board's policy decisions, saying, "Thank you, but I believe that it is most appropriate if you speak to Ms. Judy Hurst, interim CEO–I believe that you will find that Friday's DFI/NCUA action explains a lot about the Credit Union's past inability to respond to [the newspaper]." Ms. Hurst did not return CU Times' calls. Board members Monica Pacheco and Stevina Evuleocha were also called and did not return messages asking for comment.

Back Story

In a follow up to the Times' original story on the CU's woes, Vice President of Marketing Jeff Peabody wrote the paper concerning the losses in the HELOC program. "There has been a substantial correction in the real estate market. In this environment, it is not uncommon for borrowers to become delinquent. We are working diligently with our borrowers to help them keep their homes. Every member is important to us and deserves individualized attention. We offer a wide range of loan programs for a wide variety of borrowers, and Cal State 9 underwrites all of its HELOCs," continued Peabody, without further explanation.

While most of that response is standard public relations boilerplate, Peabody did not respond to a detailed list of questions about just why (or how) the CU decided to go so deeply into a RE portfolio. One of the questions that should be answered is just how Cal State 9 made the decision to either underwrite or buy such loans. The yield was in the 12% area, but how they fit into the CU's overall ALM policy is either a mystery, a miscalculation or worse.

It's true, however, that as margins tighten, some credit unions simply chase yields in order to remain profitable. Peabody's e-mail response to CU Times included this comment: "More than two-thirds of the loans in our HELOC portfolio were made to non-sub-prime borrowers with FICO credit scores above 640. The interest rate members paid on these loans was higher on average due to a variety of underwriting criteria." He did not elaborate on what the criteria might be, however, nor offer any reasoning for why, if the FICO scores are so high, such big losses have resulted.

Cal State 9 denied buying HELOCs from a vendor, with Peabody classifying the source with the amorphous term "business partner." Neither were the loans purchased, he said. "First, please be assured that Cal State 9 did not purchase its portfolio of home equity line of credit loans. Cal State 9 sourced these loans indirectly through a business partner, and every loan was underwritten by Cal State 9. All loans were made to borrowers who qualified for membership. None of our loans were secured by properties outside of California."

The "business partner" Peabody spoke of was CU Funding Group of Pleasanton, Calif., and CU Times spoke with its CEO, Steve Iversen for the follow up piece. It is not a CUSO, he said, but is wholly owned by him. In business for 8 years, he said the company deals with 15 credit unions. "Our funding comes from credit unions, but should a credit union not want to fund a loan (or loans) then we also have other sources, primarily banking lines," he said. "We have a retail side and in that way we work with credit unions to provide their mortgage services. It functions much as other turnkey mortgage operations do. We also have the CU Funding Group Indirect Real Estate Lending Program. In that capacity we use a network of 14,000 brokers in California," he said.

Iverson explained that CU Funding Group takes the credit union's underwriting guidelines and sends those to its select broker network. "Basically, we bring the CU's program to the people. We market through the network of brokers, screen applicants to see that they meet the guidelines, then underwrite the loan, send it to the credit union, which approves or denies it," he said. "If they approve the loan, we collect the information on membership and draw up the documents, send them to title after it's QC'd [passes quality control] then it goes to the credit union and they QC it and fund the loan. The CU may either keep and service the loan in its portfolio or sell it to Fannie or Freddie or whomever."

Boom to Bust

"Cal State 9 was aggressive [in it's underwriting guidelines]," Iversen said at the time. "They had high expectations when they came to us. Back in 2002 they were a struggling credit union. They've skyrocketed since then, achieving high ROI [return on investment]. When they approached us they were 3%-5% in lending in the Contra Costa and Alameda Bay area and have since grown membership by 6% and increased their real estate portfolio by more than 400%."

That struggling credit union is now wallowing in a sea of red ink. The CU's total equity we from $28.0M in June '07 to $-7.9M at the end of September. And its Other Notes, Promissory Notes category shows that it went from $35.1M in June to zero in September. That may be an indication that its corporate, WesCorp, asked for the return of liquidity.

Over the summer, Cal State 9 CU was running a "Hot Rate" CD offer of 6.00% APY for a seven-month term with a minimum of $5,000. CU officials did not respond to requests asking how much money had been raised, nor did they directly answer queries about whether the California state government had requested the return of its nonmember deposit of $20 million.

But despite trying to salvage Cal State, the NCUA's special actions team clearly faced an insurmountable challenge and finally, in concert with the DFI, put an end to Cal State 9′s bleeding. It's now up for sale.

–[email protected]