As Richard Jungen, CEO of Central States Mortgage, a mortgage CUSO in Wauwatosa, Wis., is fond of saying on the subject, “credit unions do make subprime loans. We just don't make predatory subprime loans.”

Brian Hague, president/CEO of CNBS was wailing in the wilderness even as others were proclaiming that hedge fund bailouts led by Bear Stearns (heavily invested in subprime- backed bonds) and later write downs of bad debt based on mortgaged backed securities by Citibank and others meant the market was rebalancing. So, was the worst over?

Tip of the iceberg, Hague warned. Rampant speculation always comes back to haunt, he said. Sure enough, in July, Wells Fargo & Co.'s Wells Fargo Home Mortgage said it would close its nonprime wholesale lending business, which processes and funds subprime loans for third-party mortgage brokers. Then Washington Mutual did the same. That only meant more scrutiny on those providers who continued to write such loans. Countrywide, meanwhile, was telling the media to expect steep losses on not just subprime paper, admitting that even prime loans were going delinquent, indicating a troubling trend.

Eva Weber of the Aite Group noted that all this getting out of Dodge behavior would put pressure on similar banks to follow suit. She was right about that, as credit tightened faster than links on a Spanish Inquisitor's rack.

Hindsight 20-20?

As recent as last May, JP Morgan Chase & Co. was stepping up its stake in subprime mortgages, proving that there are some who do not fear to tread on thin ice. The No. 3 bank in the country had first-quarter subprime mortgage originations of $3.02 billion financed through Chase Home Finance, a jump of 11%. That was about the same time that New Century Financial Corp was hitting the skids. It later declared bankruptcy. But selling off subprime production to investors after packaging pools of loans into bonds helped to inoculate most of Wall Street. At least until the securitization skein began to unravel.

As it turns out, many of the money center banks that created pools for investors hedged their own losses while they were still selling securitized loans to others. They may have seen it coming, too, as Goldman Sachs, Deutsche Bank, Merrill Lynch and Morgan Stanley have all been subpoenaed by New York Attorney General Andrew M. Cuomo for information on just how they packaged and sold subprime securities. The Securities and Exchange Commission is taking a magnifying glass to Wall Street's valuation process for such securities.

Merrill's CEO E. Stanley O'Neill is now gone and Citigroup's CEO Charles Prince soon followed, after posting mega-losses. They didn't see it coming, but left sailing smoothly on golden parachutes nevertheless.

Like Cuomo, who said he wants to look at appraisal scams and a lack of oversight in the secondary market as well as the role played by the rating agencies–which often gave triple-A marks to loan pools–other attorney's general in Massachusetts and Ohio are opening investigations that may serve to help the credit union effort in the long run by showcasing the damage done when lending fundamentals are ignored.

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