ALEXANDRIA, Va. – In searching for scapegoats for the huge failure of WesCorp FCU NCUA has focused increasing attention on the underwriters who sold the California corporate giant the toxic mortgage-backed securities that sunk it, especially the cozy relationship WesCorp had with now-defunct home loan giant Countrywide Financial Corp.–which was located just 50 miles down the road, in the city of Calabasas.
A report issued Friday on the cause of the WesCorp failure by NCUA’s Inspector General details how Countrywide, which was acquired by Bank of America in January 2008 as it was hemorrhaging red ink, shows that WesCorp was a regular conduit for the billions of dollars in subprime and other questionable mortgage products originated at the home loan giant. The report shows that not only was Countrywide the dominant originator and servicer of mortgages used to create the WesCorp MBS that would eventually prove toxic, but also that Countrywide-originated loans were dominant in the MBS acquired by WesCorp from other issuers.
The new report illustrates the multitude of risky mortgages, known as subprime, Atl-A, no-doc (for no documentation), “silent second,” and “scratch and dent” loans that Countrywide originated in its overheated home California market, then repackaged into mortgage securities that were ultimately purchased by WesCorp and other institutional investors.
The report shows that as WesCorp kept bumping up its own self-imposed limits on investments with a single issuer, its board continued to increase the limit to accommodate the Countrywide relationship. By June 2007, Countrywide-issued MBS amounted to126% of WesCorp‘s capital, and Countrywide was the servicer for over 220% of the underlying mortgage collateral within WesCorp’s investment portfolio, 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.
But the Inspector emphasized its Material Loss Review did not analyze the role that the conduct of third parties, including Countrywide, may have played in the demise of WesCorp, which is estimated to cost credit unions some $6 billion to resolve. That job is being left to NCUA’s office of general counsel and attorneys with the U.S. Justice Department who are sifting through the wreckage of WesCorp and the four other corporate failures to determine whether there are grounds to seek damages from underwriters and other outside parties that helped load those five corporate down with the toxic securities.
It is not clear what role Countrywide-issued MBS played in the failures of U.S. Central FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate, which together with the failure of WesCorp are projected to cost credit unions some $16 billion to resolve. The Countrywide role is expected to be further probed more as the Inspector General conducts additional Material Loss Reviews on Members United, Southwest and Constitution in the coming months.
NCUA officials have privately confirmed that they are exploring legal remedies against firms that may have sold faulty securities that led to the failure of the corporates, but would not formally discuss specifics. “NCUA is taking all appropriate actions to preserve options to seek redress for the losses incurred in connection with the corporate failures,” said John McKechnie, chief spokesman for the agency.
Attorneys elsewhere have already taken the lead in suing Countrywide, which was the biggest securitizer of mortgage securities, and other major underwriters. At least five of the 12 Federal Home Loan Banks, which are also afflicted with billions of dollars of toxic MBS they bought during the mortgage boom, have filed suits claiming the underwriters knew the loans were of poor standards when they packaged them into securities for sale to unwitting customers. In the most recent suit, the FHLB Indianapolis wants Countrywide and 32 other issuers to buy back money-losing MBS it purchased as safe investments from 2005 to 2007.
The case is one of dozens nationwide seeking so-called put-backs of soured mortgage loans. The FHLB Indianapolis says in its lawsuit that banks selling mortgage-backed securities were so eager to unload the mortgages and collect commissions that they “did not tell the truth” about what they were selling, causing FHLB to suffer “substantial losses.”
Similar suits have been filed by the FHLB Seattle, San Francisco, Chicago and Dallas.
