The failure of Southwest Corporate FCU (Southwest) will cost the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) $141 million, according to a recent report released by NCUA's Office of Inspector General (IG).
The IG report found that the failure of Southwest can be attributed to management's implementation of an aggressive investment strategy that led to a significant concentration of investments directly in privately-issued residential mortgage backed securities (MBS) and additional indirect exposure through U.S. Central Federal Credit Union’s investments in MBS.
Between March 2004 and July 2007, Southwest increased its direct concentration of privately-issued MBS 263% from $1.39 billion to $5.05 billion. This growth in its private-label MBS was fueled by an increase in Southwest's investment policy limit from 400% of capital in 2004 to 900% of capital in 2006.
In 2007, approximately two-thirds of Southwest’s $4.8 billion MBS exposure was collateralized by riskier non-prime mortgages, just when the housing market became dislocated.
Moreover, its MBS exposure was heavily concentrated in one state -- California. The California concentration represented 319 percent of Southwest’s capital.
The IG report also criticized NCUA Office of Corporate Credit Unions (OCCU) staff. It found that staff did not adequately and timely address the risks associated with Southwest’s direct concentration of and indirect exposure to privately-issued MBS. The report also criticized OCCU staff for not taking exception to the geographic concentration of Southwest's private-label MBS portfolio.
Read the report.
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