LENEXA, Kan. – When U.S. Central FCU issues its financial results for 2008 tomorrow they are expected to show a loss of more than $2 billion and that the central bank for credit unions had almost half of all of its investments in mortgage-related securities–an unusually high concentration.
"You could say they put all their eggs in one basket," said one source familiar with the situation at U.S. Central, which was taken over by NCUA on March 20. That means that almost $11 billion of U.S. Central’s investments are tied to the mortgage market in some way.
The high concentration of investments is eerily reminiscent of the last failure of a corporate credit union, the 1995 takeover of Capital Corporate FCU, which had a staggering 90% of its investments tied up in collateralized mortgage obligations, the source noted.
WesCorp FCU, taken over by NCUA the same day, was even more concentrated on the mortgage market, with an astounding 75% of its investments related to mortgages, according to NCUA.
The heavily concentrated investment portfolios–which include agency and private-label mortgage backed securities, commercial MBS, collateralized debt obligation backed by mortgages and agency debt–meant that once the mortgage market started to spiral out of control there was no room to avoid the crash in the mortgage market.
The House Financial Services Committee is expected to focus on the concentration of mortgage securities during hearings next week on the causes of the U.S. Central and WesCorp failure. NCUA Chairman Michael Fryzel and representatives of NAFCU and CUNA are expected to testify at the hearings.
U.S. Central is expected to report a $2.2 billion loss for 2008, which will erase all of its retained earnings; and all $750 million of its paid-in-capital and 63% of its membership capital shares held by its 27 corporate members. Those losses will trickle down to credit unions in one way or another, either as charges to be taken by their corporates, or charges to be accrued by the National CU Share Insurance Fund, which credit unions are responsible to replenish.
