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). 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.
With negative amortization along with a low initial down payment, a likely second mortgage and declining home prices, the major players in this area of specialty mortgage lending either failed or sold themselves for a cut-rate price before failing. Because of myriad accounting problems, BankUnited Financial had not filed a 1-Q or 10-K since October, when they filed an amended report for the quarter ended March 31, 2008. As of that quarter, option-ARMs represented 59% of BankUnited's total loans, or $7.4 billion. Countrywide Bank FSB avoided failure when its parent, Countrywide Financial, was acquired by Bank of America ( BAC - Get Report) in July 2008.
Washington Mutual -- by far the largest failed bank or thrift, with total assets of $307 billion -- failed in September 2008, with the Federal Deposit Insurance Corp. selling the thrift's branches, deposits and nearly all assets to JPMorgan Chase ( JPM - Get Report). Wachovia had inherited its portfolio of option-ARMs through its ill-advised purchase of GoldenWest Financial in October 2006. After being pressured by regulators to sell, Wachovia first made a deal to sell to Citigroup ( C - Get Report), which was trumped by a superior offer from Wells Fargo ( WFC - Get Report), which completed its acquisition of Wachovia at the end of 2008. The Office of Thrift Supervision allowed BankUnited FSB to keep operating, even though the institution was critically undercapitalized since Dec. 31, when the thrift's Tier 1 leverage ratio was 1.37% and its total risk-based capital ratio was 3.60%. These ratios need to be at least 5% and 10% for a bank or thrift to be considered well-capitalized under ordinary circumstances. BankUnited FSB's capital ratios were actually negative as of March 31. Clearly the OTS was doing everything it could to allow the thrift extra time to raise capital and avoid another failure. BankUnited FSB had 86 offices and nearly $13 billion in assets when it failed. With the thrift reporting $2.4 billion in uninsured deposits as of March 31, the FDIC had clear motivations to make a deal with the private equity investors to acquire all of the thrift's retail deposits. TheStreet.com Ratings had assigned BankUnited, FSB an E-minus (very weak) financial strength rating in December based on September 2008 financial information, downgrading the rating from a D- (weak) the previous quarter.
The thrifts involved in the five other back-dated capital infusions discussed in the report were not identified, but apparently BankUnited, FSB was one of them, since its holding company transferred $80 million to the institution in August, but the capital was included in BankUnited FSB's June 30, 2008 thrift financial report. While the inspector general's report didn't specifically mention BankUnited, it said that the OTS directed one of the thrifts to backdate an August capital infusion to June 30. In another instance of backdating described in the report, the report said the OTS "objected" to one instance but took no further action when the thrift backdated a capital contribution anyway. The report said the agency discovered the other three instances of backdating after they had taken place, but took no action against the thrifts. Looking back, it is apparent that the agency was taking steps earlier this year to address this problem, announcing on Feb. 26 "new initiatives" to "enhance supervision of large thrifts and to ensure timely corrective actions."
Free Financial Strength Ratings for Banks and Thrifts Although Thursday was another costly day for the FDIC, there were no losses to depositors when BankUnited FSB failed, despite the high total of uninsured deposits. Still, customers with brokered deposits will be inconvenienced and are likely facing lower CD rates as they make decisions on where to deposit the money next. The FDIC has temporarily increased the basic individual deposit insurance limit to $250,000 on non-retirement balances and has waived insurance limits on non-interest-bearing checking accounts, but the waiver of is also set to expire at the end of the year, with most other balances reverting to their usual $100,000 limit. Another thing to consider is that even if your personal deposits are under FDIC insurance limits, you or someone you know are probably associated with a business, organization or government entity (such as a school district) with large deposits of somebody else's money in a local bank. In this environment, it is a very good idea to look into the health of your bank. TheStreet.com Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans which are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.