Brutal First Quarter for BankUnited

One of the features of option-ARMs is that the loans "recast" if the customer continues to make the lowest option payments until their mortgage loan's principal balance grows to a certain point. This means that the loan payment is recalculated, based on current rates and fully-amortizing the new balance. The new loan payment will be much higher than the old one. The rate may be higher than the loan's original rate, and there will no longer be an option payment. The new payment will include all the previous month's accrued interest and a portion of the principal, just like any other mortgage loan.

At BankUnited, option-ARMs recast when the loan-to-value (LTV) ratio hits 115%. In its earnings release, the company stated that $13.6 million in loans had reached the 115% LTV and been recast, as of March 31. This number was projected to reach $90 million over the next two quarters.

Considering that the LTVs for these loans are based on the original appraised values of the homes and how much values have been dropping, these borrowers will be "upside down" on their mortgages by a very significant percentage, making it likely the loans will go sour.

Loan-loss reserves totaled $202 million as of March 31, and covered 33.25% of nonperforming loans. Net loan charge-offs for the first quarter totaled $13.3 million, so the company pointed out that its $98 million in loan-loss provisions has so far kept well ahead of the pace of actual loan losses.