MIRAMAR, Fla. - Growing losses on exotic mortgage-backed securities have forced Eastern Financial Florida CU to submit new financials to NCUA showing even larger record losses for 2007 of $68.9 million.
The state’s third largest credit union, already weighed down by a failed member business loan to an upscale condominium project in West Palm Beach, has written down the value of the securities, known as collateralized debt obligations, or CDOs, by $68 million. That pushed its fourth quarter losses from a previously reported $49.5 million to a whopping $73.2 million, and full-year losses from $45.2 million to $68.9 million, believed to be the largest loss ever for a credit union.
The re-audited financials including the larger losses were submitted by the credit union’s auditors, according to Mark Holmes, a spokesman for the $1.8 billion CU. The additional losses were attributed to the credit unions CDO investments, he said. CDOs, which have caused major losses at the biggest banks, are bonds created from pools of loans which are generally derived from mortgage debt. While they are not considered permissible investments for federally chartered credit unions, Eastern Financial’s Holmes said the state charter obtained special approval from state regulators for the investment.
While most of the losses represent a decline in the market value of the CDOs, Eastern Financial hopes conditions will improve, thus erasing some of the losses. “Some of it has to be taken as a loss (according to accounting rules),” said Holmes.
The additional CDO losses come as the credit union won a $37.3 million court judgment last week on a West Palm Beach condominium development on which it had foreclosed. Eastern Financial lent the funds to Miami-based Merco Group, which never began construction on the project. The $300-million project was to hold 338 units that were supposed to sell for up to $4 million each. A public auction of the property in the Palm Beach County Court will be held May 12.
The deterioration of the credit union’s finances has caused an erosion of its asset base and erased $114 million in capital over 2007, according to the annual 5300 Call Report submitted to NCUA.
The situation forced the February departure of Stephen McGill, CEO of Eastern Financial. The credit unions is currently being run by two senior executives as the board seeks a replacement to McGill, according to Holmes. For the first quarter of 2008, Eastern Financial reported a $5.5 million loss.
State CU supervisor Sharon Whiddon would not discuss the details of the CU’s condition, citing the state’s confidentiality rules, but did say Eastern Financial holds what is considered adequate capital, 7%. Eastern Florida has survived major crises before, most especially the 1991 bankruptcy and eventual liquidation of its chief sponsor Eastern Airlines, which promoted it to adopt a multiple group form, now serving more than 1,000 select groups.
