ALEXANDRIA, Va. (5/11/11)--The purchase of “significant holdings" of private-label mortgage-backed securities and a failure to identify and manage risks related to this purchase led to the conservatorship of Members United Corporate CU, the National Credit Union Administration’s (NCUA) Office of Inspector General (OIG) has reported. The OIG in its material loss review of Members United specifically found that the corporate credit union’s executive management and board of directors:
* Did not establish investment sector concentration limits in a timely manner; * May have been overly reliant on credit ratings when purchasing the securities and monitoring its securities portfolio for signs of risk; * Relied on monoline insurers to provide credit enhancement to a portion of the non-agency mortgage-backed securities in the portfolio; * Did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral of the mortgage-backed securities held in the investment portfolio; and * Relied on the corporate credit union structure to provide financial strength and liquidity.
The OIG said that the executive management and board of Members United overall “failed to recognize the substantial risk they were undertaking with significant investments in complex mortgage-backed securities, with a substantial portion of these securities backed by subprime assets.” The leadership team also “allowed the investments in mortgage-backed products to represent a significant concentration compared to net worth and they failed to impose limits in these securities” and “did not adequately recognize the credit risk associated with the underlying collateral.” The report found that NCUA examiners had noticed subprime-related issues as early as August of 2007, when the corporate held $4.9 billion in mortgage-backed securities, $1.2 billion of which were considered subprime. However, NCUA examiners did not “raise supervisory concerns or issue a document of resolution related to the sub-prime nature of the mortgage-backed securities at that time,” instead waiting until May of 2008. The OIG report said that quicker NCUA action could have resulted in a reduced loss to the NCUA’s Temporary Corporate Credit Union Share Insurance Fund. The NCUA in the report said that it has reacted to these and other subprime-related issues, addressing potential issues through new corporate credit union rules, imposing stronger concentration limits, and prohibiting the purchase of privately issued residential mortgage-backed securities. Members United became known as Members United Bridge Corporate shortly after it was taken into NCUA conservatorship last November. The corporate announced that it was rebranding itself as Alloya Corporate FCU in late April. The renamed corporate will retain the assets, people, processes, products and services of Members United Bridge. For more on the NCUA OIG report, use the resource link.