WAUWATOSA, Wis. — The morass in the mortgage market claimed another major mortgage bank for credit unions last week, Central States Mortgage Co.
The credit union owned CUSO, which provides loan services for more than 250 credit unions, abruptly closed its doors after its financing was cut off by Members United Corporate FCU. The troubled corporate declared Central States in default on a $33-million line of credit and called the loan.
"It took everybody by surprise. We thought that may have to happen in the future but I think it surprised all the shareholders how quickly the board reacted," said Bill Kuter, president of Lifetime CU, one of the 25 credit union owners of Central States.
Dennis Degenhardt, president of Glacier Hills CU and a Central States director since December, said a good share of the member credit unions saw the troubles coming. "The problems came to light and we started working on it," he stated.
Central States originated $523 million in loans last year, down from $707 million in 2007, and from a high of $1.4 billion as recently as 2004. The closure of Central States came two weeks after CU National Mortgage and its parent US Mortgage Corp., which serves 120 CUs, filed for bankruptcy amid a criminal probe.
Legal Battle Heats Up
The Central States closure came as a legal battle between the company's founder Dick Jungen, and the board heated up last week, with Jungen responding to allegations he defrauded the company by claiming the board's own actions killed the mortgage lender. "Until last Thursday (the day before Members United called its loan), CSMC reported positive cash flow to its clients and employees and a rosy plan for the future," said Jungen's attorney Steven Kravit. "Suddenly, management said there was a crisis."
"The board uncovered a serious cash flow deficiency. The matter is being investigated. It was reported that present management collected significant sums from sales or refinancing of CSMC mortgages, but used those funds for operations rather than paying off the mortgages of the underlying lenders," said Kravit.
Jungen founded Central States in 1984 and sold a 75% stake in the company to 25 Wisconsin and Illinois credit unions and the Wisconsin CU League's W.C.U.L. Services Corp., but continued to run the company as president and CEO until last July when he was fired. In a civil suit filed in state court last month, Central States claims that Jungen defrauded the company of $15 million through a secondary funding vehicle he secretly controlled called Interim Funding, which allegedly manipulated its financing to avoid risky loans, leaving them instead with Central States.
Jungen's lawyer Kravit denied the allegations, saying Central States' loan officers and managers always knew that Jungen owned Interim Funding. "The problem here is Central States management and board that is in control has tried to conveniently blame it all on the Jungens (including Dick's estranged wife Elaine) and other of my clients," said Kravit.
Meantime, the financial toll of the Central States failure is resonating throughout the credit union participants, many of which have also gotten burned by recent debacles with subprime auto lender Centrix Financial and with loan participation interests with failed Norlarco CU.
The 25 credit union owners of the mortgage CUSO charged-off a total of almost $3 million of their stock in the 25-year-old company in the fourth quarter of 2008, according to data disclosed on 5300 Call Reports submitted to NCUA. In addition, several credit unions are also taking hits on Central States loans they participated in.
The W.C.U.L. Services Corp. is also believed to have charged-off the value of its shares.
Charge-Offs And Write-Downs
And several lenders, including Members United Corporate FCU, are working to determine what portion of loans to the company will be either charged-off or written-down.
The biggest investor in Central States apparently was Guardian CU. The $265-million West Allis credit union had to charge off its $108,720 investment and $1.3 million loan to the company.
NCUA records show other credit unions exposed to Central States: Sherwin Williams Employees CU in South Holland, Ill., which had $50,000 in stock and a $1 million share of a loan participation; Northwestern Mutual CU $275,000 in stock; FOCUS CU (formerly known as Wauwatosa Employees CU) $225,000 in stock; Aurora Healthcare CU $270,000; Allco CU $255,000; Superior Choice CU $60,000.
Dean Wilson, president of FOCUS CU and chairman of the Central States board, said last week the company will continue to service loans, even as it exits the originations business. "While the decision to close was a difficult one, it was necessary and in the best interest of our shareholders," said Wilson. "Our goal is to assist our customers now such that this development does not affect service to their members," he said.
