An over-concentration of subprime MBS caused the failure of Members United Corporate Federal Credit Union, the one-time $14 billion corporate that is restructuring itself, National Credit Union Administration (NCUA) said in a new report issued last night.

By the time of its September 2010 takeover by NCUA, Members United, the conglomeration of three corporate credit unions, has almost $5 billion – 70% of its investments – tied up in either subprime or Alt-A MBS, according to the report by NCUA’s Office of Inspector General.

Members United was one of three corporate failures taken under conservatorship by NCUA in September 2010, then liquidated weeks later, along with Southwest Corporate Federal Credit Union and Constitution Corporate Federal Credit Union. By then, losses at Members United of $1.5 billion over the previous two years had erased $900 million of capital for its 2,050 credit union members, one-fourth of all credit unions. Since then, the estate of the corporate failure has cost the NCUA’s corporate bailout fund an additional $400 million in losses, according to the report.

Warrenville, Ill.-based Members United, which was chartered in 1975 as Mid-State Corporate Credit Union before merging with Empire Corporate Federal Credit Union and Central Credit Union Fund, is in the process of recapitalizing and reorganizing itself as Alloya Corporate Federal Credit Union.

The findings by the agency’s inspector general show Members United to be the third of five corporate failures tied to the subprime mortgage market, following similar findings on the demise of WesCorp Federal Credit Union and U.S. Central.

The report spreads the blame evenly between Members United’s management and NCUA’s supervision, saying the failure can be attributed, “in part to inadequate management and Board oversight that exposed the credit union to excessive amounts of financial risk due to significant holdings of private label MBS including subprime and Alt-A mortgage-related securities.”

But the inspector general, as he did in the failures of WesCorp and U.S. Central, concluded that NCUA was slow to grasp the import of the corporate’s reliance on subprime mortgage securities.
“We determined NCUA did not timely or adequately identify key risks related to Members United’s investment portfolio,” said the report. “Specifically, NCUA failed to identify and require corrective action on the credit risk in Members United’s investment portfolio related to the concentration of mortgage-backed securities until May 2008. By that time, severe market dislocation had occurred and Members United’s significant holdings of RMBS were experiencing rapid declines in value and were increasingly illiquid.”

“We believe stronger, more-timely supervisory actions and restrictions on concentrations could have provided opportunities for reasonable divestiture of investment securities without incurring significant realized losses, which eventually caused the NCUA to conserve Members United.”
The report noted that under NCUA’s expanded powers authority, Members United was allowed to hold subprime MBS with lower investment ratings, that eventually deteriorated at a rapid rate during the mortgage market panic of 2007-2009.

The report also says that Members United’s CEO Joseph Herbst was slow to act on the corporate’s exposure at U.S. Central during the deterioration of the one-time $52 billion corporate because he was then serving as chairman of the board of U.S. Central. Members United eventually lost all $308 million of its capital invested in U.S. Central exacerbating its own investment losses.

In addition, Members United was severally impacted by the bankruptcy and other financial difficulties at the monoline bond insurers which provided insurance for some $5 billion of MBS. Losses on those insured MBS could amount to as much as $1.2 billion, according to the report.

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