ALEXANDRIA, Va. — A report on the failure of WesCorp Federal Credit Union in California concludes that WesCorp had too much of its investments tied to its home state's real estate market and to one issuer, Countrywide Financial Corp.

The Material Loss Review from the National Credit Union Administration's Office of the Inspector General said losses from the WesCorp failure would be at least $5.6 billion.

The report, issued Friday, concludes that WesCorp management continued to chase higher returns on investments by increasingly risky strategies. It loaded itself up with collateralized debt obligations, "silent second" mortgages, scratch-and-dent mortgages and alternative-A and subprime mortgages largely based on dubious collateral provided by Countrywide, the report said.

The growing concentration of risk went largely unnoticed by NCUA examiners. The "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," the report said.

"It was just incredible, they just kept on seeking higher returns," William DeSarno, the IG, told Credit Union Journal.

As a result, WesCorp's "concentrations of [residential mortgage-backed securities] with collateral in a single state — California — became excessive," the IG said. In addition, a large concentration of WesCorp's RMBS was associated with 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 the June 2007 examination date, when it was second behind Washington Mutual Mortgage Services Corp.

The report found that WesCorp was not only buying MBS issued by Countrywide, it was also buying 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 the California corporate, the NCUA took WesCorp under conservatorship in March 2009 and liquidated it last month. Countrywide, on the verge of bankruptcy, was sold to Bank of America in fall of 2009.

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