ALEXANDRIA, Va. – A new report on the failure of WesCorp FCU concludes the one-time $32 billion corporate had too much of its investments tied to a single real estate market–its home state of California–and one issuer, Countrywide Financial Corp., the California-based home loan giant that went down at the height of the mortgage bust.
The new Material Loss Review issued this afternoon by NCUA’s Office of the Inspector General estimates losses from the WesCorp failure at at least $5.6 billion.
The report concludes that the spectacular corporate failure occurred because WesCorp management continued to chase higher returns on investments by increasingly risky strategies, loading up the corporate with such instruments known as collateralized debt obligations, or CDOs, “silent second” mortgages,’ and “scratch and dent” mortgage, Alt-A and subprime mortgage which were largely based on dubious collateral provided by Countrywide.
The growing concentration of risk, on mortgage-backed securities, on one state and on one issuer, went largely unnoticed or uncommented on by NCUA examiners. NCUA “examiners either did not recognize or did not take issue with the potential risk associated with WesCorp‘s geographic, issuer, originator, and servicer limits or concentrations early on,” said the new report. “It was just incredible, they just kept on seeking higher returns,” William DeSarno, the IG, told the Credit Union Journal.
As a result, WesCorp‘s “concentrations of (residential MBS) with collateral in a single state – California – became excessive,” said the IG. In addition, a large concentration of WesCorp‘s RMBS was associated with a single entity - Countrywide Home Loans. As of the annual examination periods between August 2004 and February 2008, Countrywide had the highest single concentrations as originator and servicer of the underlying mortgage collateral within WesCorp‘s RMBS portfolio. Countrywide was also the highest issuer of securities in WesCorp‘s portfolio except for as of the June 2007 examination date when it was second behind Washington Mutual Mortgage Services Corp.
The report found that not only was WesCorp buying MBS issued by Countrywide, but also MBS from other issuers with Countrywide loans as the underlying collateral. For example, the underlying mortgage collateral of a specific security issued by Greenwich Capital/Royal Bank of Scotland was collateralized entirely (100%) with Countrywide-originated mortgages. By June 2007, Countrywide was the servicer for over 220% of the underlying mortgage collateral within WesCorp’s investment portfolio.
As of June 2007, Countrywide-issued RMBS were valued at 126% of WesCorp‘s capital, the IG noted.
“We believe that in having such a significant concentration of RMBS originated, issued and serviced by a single financial institution, WesCorp exposed its own balance sheet to the economic viability of that single entity as a business enterprise, including the pressures that a company may face to remain afloat in changing economic environments,” said the IG.
Between August 2004 and February 2008, the portion of the RMBS portfolio having collateral in California ranged between 45% and 67% of WesCorp‘s entire concentration of privately-issued RMBS.
“More importantly,” said the report, “despite the growing concentrations of RMBS associated with California and with Countrywide as the issuer, originator and servicer, we found no evidence (NCUA) examiners took notice of or questioned the concentration levels until the June 2007 examination—at about the start of the credit market dislocation.
Faced with growing losses at California corporate, NCUA took WesCorp under conservatorship in March 2009 and liquidated it last month. The failure of WesCorp erased $2 billion of capital held in the corporate by 1,022 credit unions around the country, and will cost NCUA an additional $5.6 billion to resolve, Countrywide, on the verge of bankruptcy, was sold to Bank of America in the fall of 2009.
