A new report on the failure of WesCorp Federal Credit Union concludes that the one-time $32 billion corporate CU had too much of its investments tied to a single real estate market — its home state of California — and one issuer, Countrywide Financial Corp.
A new report from the Inspector General of the National Credit Union Administration estimates that the WesCorp failure could cost 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 on CDOs, "silent second" mortgages, alt-A loans, and other dubious collateral provided by Countrywide. (CFC is now the property of Bank of America.)
The IG says the growing concentration of risk 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," says the new report.
"It was just incredible — they just kept on seeking higher returns," said William DeSarno, the NCUA IG.
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 MBS 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.
Faced with growing losses at the California corporate, NCUA took the San Dimas, Calif.-based WesCorp under conservatorship in March 2009 and liquidated it last month.
Countrywide, on the verge of bankruptcy, was sold to B of A in August 2008.