Southwest Federal Credit Union

Credit Unions Blame Banks for $2.7B Fiasco

     KANSAS CITY, Kan. (CN) - The nation's largest corporate credit union was forced into involuntary liquidation after being stuck with more than $2.7 billion in residential mortgage-backed securities, the National Credit Union Administration Board claims.
     RBS Securities and JPMorgan Securities are lead defendants in two massive federal complaints.
     The National Credit Union Administration Board sued as liquidating agent of the U.S. Central Federal Credit Union, which at the time of accepting the securities was the largest corporate credit union in the country.
     In its complaint against lead defendant JP Morgan, the Board also sued on behalf of the Western Corporate Federal Credit Union, United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union, all of which were forced into liquidation when the securities tanked.
     The credit unions bought more than $2.735 billion of the securities, many of which the board says were artificially inflated to have a "triple-A" rating.
     "The offering documents represented that the originators adhered to the underwriting guidelines set out in the offering documents for the mortgages in the pools collateralizing the RMBS [residential mortgage-backed securities]," the complaint against lead defendant RBS Securities fka Greenwich Capital Markets states.
     "In fact, the originators had systematically abandoned the stated underwriting guidelines in the offering documents. Because the mortgages in the pools collateralizing the RMBS were largely underwritten without adherence to the underwriting standards in the offering documents, the RMBS were significantly riskier than represented in the offering documents. Indeed, a material percentage of the borrowers whose mortgages comprised the RMBS were all but certain to become delinquent or default shortly after origination."
     The Board says it found patterns in the failed RMBS: a surge in borrower delinquencies and defaults on the mortgages in the pools, actual losses to the underlying mortgage pools within the first 12 months after the offerings exceeded expected losses, and a high percentage of the underlying mortgage loans were originated for distribution.

NewsDaily: Credit union regulator sues JP Morgan and RBS

The National Credit Union Administration said the lawsuits seek damages in excess of $800 million and are related to the failure of five corporate credit unions.

The agency said in a statement on Monday that it may file more lawsuits in an effort to recover billions of dollars in losses related to the failure of these institutions.

"NCUA's legal actions are based on ongoing investigations of individuals and entities responsible for selling these securities to the failed institutions," said NCUA Board Chairman Debbie Matz. "By these actions we intend to hold responsible parties accountable."

JPMorgan and RBS declined to comment.

The lawsuits, filed in U.S. District Court in Kansas, allege that the firms made "numerous misrepresentations" in the offering documents for the securities.

"These misrepresentations caused the corporate credit unions that bought the notes to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial," NCUA said.

Corporate credit unions provide services to retail credit unions including lending, as well as check and payment clearance services.

The wholesale credit unions have experienced more troubles than their retail counterparts because they did not face the same restrictions on permitted investments, leading to big losses during the financial crisis.

The NCUA seized three large corporate credit unions in 2010 after seizing two in 2009.

The five institutions are Members United Corporate Federal Credit Union of Warrenville, Illinois; Southwest Corporate Federal Credit Union of Plano, Texas; Constitution Corporate Federal Credit Union of Wallingford, Connecticut; U.S. Central Corporate Federal Credit Union of Kansas; and Western Corporate Federal Credit Union of California.

The NCUA said in September last year that the five had $50 billion in troubled assets on their books that the agency would try to sell.

Matz said then the seizure will ultimately cost the industry between $7 billion and $9 billion and NCUA will collect this amount from credit unions over the next 10 years.

The lawsuit against RBS involves about $565 million in claims while the lawsuit against JPMorgan involves about $278 million in claims, the agency spokesman said.

Any money recovered by the lawsuits would go toward reducing the cost to credit unions of covering the failure of the five institutions, the regulator said.

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Corporate credit unions competitive environment may stress financial condition, posing challenges for NCUA oversight : report to the Ranking Minority Member, Committee on Banking, Housing, and Urban Affairs, U.S. Senate.

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