Q&A with Emily Hollis

Emily Hollis
January 17, 2012 | COMMENTS

Question: A few years ago, there was so much discussion on the corporate credit unions’ securities and how much losses they would incur. I remember industry leaders predicting that losses would be realized way out in the future. Is that still true? Also, will the NCUA lawsuit settlement help?

In 2009, there was a series of articles discussing projected credit impairment of the corporate credit unions’ securities. It seemed unfathomable that the projected losses were more than $12 billion and WesCorp losses alone were almost $7 billion.

Losses of this magnitude can be realized quickly due to the type of securities purchased. Support classes absorb all losses from the pool of mortgages and are the first to lose principal when defaults start to occur. When losses exceed the principal value of the support bonds, the mezzanine securities begin to absorb all losses. When the mezzanine securities lose 100 percent of their principal, the senior supports then absorb all losses until they lose 100 percent of principal value. Only after the senior supports are totally gone, do losses touch the senior securities. Only at this time do the senior securities perform similarly to a credit union member loan, in which the percent of mortgage losses actually equal the percent of security losses.

WesCorp owned almost $6 billion of senior mezzanine securities, the majority of which I imagine are experiencing severe losses, and $3 billion of senior support (higher quality than mezzanine) structures (see April 2009 “Ask Emily” article for information on credit structure). In June 2009 I wrote an article in which I predicted losses on one of WesCorp’s senior support structures (CUSIP 751153AC) in response to a question posed referencing Chip Filson’s earlier article written the previous April. We were projecting that this security would lose 43 percent of its original value in less than one year with the first loss hitting in November 2009. In actuality, the losses started hitting the tranche later than we projected but losses ended up higher at 66 percent of the original balance.


The chart above is a graphical representation of the losses that began in February 2010. The security had paid down by 29 percent as the support and mezzanine securities took all hits. However, when this senior support bond became the “first loss” piece, the losses eroded 66 percent of the original principal or 90 percent of principal at the time of the first loss. Within 20 months, the security was gone.

As far as the NCUA lawsuits with the dealers, this is really good news for the industry. The question of misrepresenting certain aspects of the collateral backing the securities is perhaps valid; however, the structure is fairly clear. These support-type tranches had the risk of losing 100 percent of principal as they supported the senior structures. Even though in 2006, it appeared to be so remote that home values would drop so dramatically and losses would be so severe, the risk was still there!

Emily Hollis, CFA, is a partner with ALM First Financial Advisors in Dallas, Texas. Contact Hollis at 800-752-4628 or ehollis@almfirst.com.