BankUnited: Final Nail in Option-ARM Coffin

BankUnited FSB's failure Thursday represented the end of an era, as the last of the large savings and loan institutions that forayed heavily into mortgages that allowed borrowers to pick what they wanted to pay on a monthly basis during the housing boom was shut down.

BankUnited FSB, which was acquired by a private equity consortium after being closed by regulators on late Thursday, was a subsidiary of BankUnited Financial (BKUNA Quote). The lender had a heavy exposure to option-payment adjustable-rate mortgages, which had earlier spelled doom for other big lenders like the failed Washington Mutual and troubled Countrywide Financial and Wachovia, both of which were acquired last year.

Option-ARMs typically featured three monthly payment options. The lowest option was usually for such a small amount that not only was no portion of the loan's principal balance paid, the previous month's interest wasn't covered and the loan balance increased. This phenomenon is known as negative amortization.

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