A new report issued by the National Credit Union Administration blames the agency's Office of Corporate Credit Unions for failing to identify a high concentration of risky MBS at the now defunct Southwest Corporate Credit Union of Texas, a $12 billion institution.

The failure of Southwest Corporate, one of five corporate failures, is expected to cost $141 million to resolve, according to the report issued by the NCUA's Office of the Inspector General.

The IG's office says NCUA's corporate examiners failed to grasp the high concentration of Southwest's investments in private label MBS, in particular bonds backed by homes in a single state – California.

In July 2007, Southwest had $1.9 billion, or 43% of its $4.4 billion RMBS exposure to mortgage collateral in California.  The California concentration represented 319% of Southwest's capital.

Examiners claims that between NCUA's March 2004 examination of Southwest and the start of the credit market dislocation in July 2007, the institution's management increasingly made privately-issued RMBS a significant concentration of its investment portfolio. During this period, Southwest management increased its direct concentration of privately-issued RMBS by 263%, from $1.39 billion to $5.05 billion.

As a percentage of Southwest's overall investment portfolio, Southwest management increased its exposure to the residential real estate market through privately-issued RMBS from 16% of Southwest's $8.47 billion portfolio as of March 31, 2004 to nearly half of the corporate's $10.5 billion investment portfolio as of July 31, 2007.

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