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Friday, May 22, 2009

The Inside Story of Bank United

If you work in the mortgage industry, the closing down of Bank United should come as no surprise.

Back in November, Bank United suspended all mortgage activities and turned their mortgage department into a loan modification division. They were in charge of modifying each and every loan they still owned. Bank United, you see, from about 2004-2007 specialized in a loan known as the Option Arm.

The Option Arm is by far the most sophisticated loan that was ever created. It gave a plethora of payment options. For instance, you can make a payment as though the rate were 1.25% on a thirty year fixed. As such, a 300k loan could go for like $1000 monthly. Of course, this is not the rate on the loan. It's just a minimum payment option and this payment option was available for five years. The rate was something entirely different, however, after five years, the loan resets and you are forced to pay the normally amortized payments over what is left, now in 25 years. In other words, after five years there is a massive payment shock.

This particular loan wasn't merely their bread and butter but these loans simply dominated their portfolios. These loans are now toxic on steroids. So, for months the folks at Bank United were trying desperately to change these loans into something the borrowers could afford before the loan changed around with the five year period beginning to end.

The coming nightmare in Option Arms is something I have already written about. Now, banks like Countrywide, Washinton Mutual, and World Savings all specialized in these loans and none are any longer around. Now, while most other banks didn't have nearly the Option Arm portfolio, we are just beginning to have these loans reset. I think this Option Arm and the looming crisis in commercial loans will whack the banking industry just as they think they see the light at the end of the tunnel.


Anonymous said...

"I don't think this Option Arm nor the looming crisis in commercial loans will whack the banking industry just as they think they see the light at the end of the tunnel."


Anonymous said...

These Option ARM loans sound like NFL player contracts, where teams offer players huge balloon payments toward the end of the contract knowing they'll just cut the guy or renegotiate the deal sometime in the future.