Tuesday, May 10, 2011

IG Releases Material Loss Report on Members United

NCUA's Office of the Inspector General (IG) released its material loss report on the failure of Members United Corporate FCU. NCUA has estimated that as of February 28, 2011 the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) had recorded a loss of $400.1 million for Members United.

The IG report found that management and the Board provided inadequate oversight, which resulted in Members United purchasing significant holdings of private-label mortgage-backed securities (MBS), many of which were later downgraded to subprime and Alt-A. Specifically, Members United management:

1. Did not establish timely investment concentration limits;

2. Relied too heavily on ratings assigned to the securities by Ratings Agencies to monitor the amount of credit risk in the investment portfolio;

3. Relied on monoline insurers to provide credit enhancement to a portion of the non-agency mortgage-backed securities in the portfolio;

4. Did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral; and

5. Relied on the corporate credit union structure to provide financial strength and liquidity. Members United did not adequately evaluate the risk of investing with and having its only line of credit with U.S. Central.

As a result of the dislocation in the credit market, the actions of management and the credit union's Board had serious consequences for the Members United. The corporate credit union experienced a deterioration in the market value of its MBS portfolio. The decline in the market value of its investments limited its ability to sell securities hampering its ability to meet the liquidity needs of member credit unions. Public confidence in Members United debt eroded due to ratings downgrades, which impeded its ability to issue debt to meet its liquidity needs.

The IG report also notes that NCUA failed to adequately assess or timely identify key risks related to Members United's investment portfolio.

The first time that NCUA examiners commented on Members United exposure to subprime and Alt-A MBS was in August 2007. At that time, Members United held almost $4.9 billion in MBS, of which 67 percent was subprime or Alt-A. However, examiners did not raise supervisory concerns or issue a document of resolution.

In May 2008, NCUA examiners expressed concerns regarding the corporate credit union's significant concentration in mortgage-backed securities and issued a document of resolution about the appropriateness of the existing concentration limits.

The IG report states that NCUA also placed too much reliance on credit ratings and failed to recognize the lack of diversification in Members United's investment portfolio.

Read the IG Report.
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