MILWAUKEE – A suit filed this week by the credit union owners of Central States Mortgage Co. against the founders of the company, one of the state’s largest mortgage lenders, illustrates some of the perils of the additional roles corporate credit unions have taken on in recent years as they sought new sources of income.
The suit claims that losses of at least $15 million were the result of the conspiracy to shift distressed mortgage loans from a company owned by Central States founder and former CEO, Richard Jungen, to Central States, a Wauwatosa mortgage bank now owned by a group of 25 credit unions and the Wisconsin CU League.
The suit, filed in state court, explains how tens of millions of dollars of mortgages originated through more than 250 Midwest credit unions were financed through a warehousing line of credit provided by Members United Corporate FCU, the $9 billion corporate credit union that is struggling with billions of dollars of distressed assets. Members United, which is holding as much as $2 billion of unrealized losses on its books, announced in December it was laying off 20% of its employees after it reported a $27.9 million loss for the first three quarters
The suit claims that as a result of the scheme, the Members United’s warehouse line of credit improperly holds millions of dollars in delinquent and foreclosed mortgage loans, including loans for completed construction not permitted to be financed under the line of credit.
Members United, which is the result of the 2007 merger of Mid-States Corporate FCU and Empire Corporate FCU, is one of several corporates to provide funding for credit union mortgage lending in an effort to help credit unions to benefit from the mortgage boom and to diversify their own businesses. U.S. Central FCU, for example, held more than $85 million in jumbo mortgages it had purchased from credit unions, which has turned out to be a money losing business. That business lost more than $120,000 in October and November, according to U.S. Central’s financial reports.
In its suit, Central States claims that Jungen, who sold a majority of the company to credit unions in 1997, secretly controlled a secondary market conduit that was financing the company’s mortgages and was shifting millions of dollars of losses to the Central States. The company, organized as a CUSO, claims it has incurred as much as $15 million of losses from the scheme. It is unclear what portion of the losses, if any, will be assigned to Members United.
Jungen started Central States in 1992, then sold a majority stake to the credit union in 1997, retaining a small ownership stake and the role of CEO until July 2008, when he was terminated. Also named in the suit was Jungen’s wife, Elaine, and three other executives, who were all fired after the Central States board learned of their roles, according to the suit.
"We’re basically seeking damages from these individuals," Craig Lester, president of Central State, told The Credit Union Journal yesterday.
Jungen could not be reached for comment yesterday.
A spokesman for Members United said as a matter of policy, the corporate does not comment on on-going litigation or litigation by our members.
