Yesterday, we talked about negative amortization. Today, we’ll see how the BankUnited “success” became unsupportable as the Option ARM’s term proceeded.
We saw that if you had an Option ARM on your home and you paid the minimum payment the bank requested (most borrowers did NOT understand what this really meant), it would not take long before you owed more on your house than it was worth. (Keep in mind, this was true before the housing collapse which devalued almost all the homes across America.) But, BankUnited (and others like it) had a special kicker on these loans. You see, once your loan balance with the bank reached 115% (some loans used a lower, 110%, limitation) of the original loan principal, the terms of your loan “converted”. That meant you now had to pay your mortgage in full (not like we discussed yesterday, where a special low payment was offered to the borrower). (Using yesterday’s car loan example, you can see the value of the car keeps depreciating and the loan value keeps increasing (which is why this is even a worse idea to use for car financing). [In reality, the lender compounds monthly and waits 5 days from when your payment is received to credit your loan payment, which escalates the loan value even more.) If the bank calls in the loan- and wants payment over the length of the remainder of the term [i.e., 10954.88 over two years at year 8] , the borrower could not pay it (or he/she would already have done so.) And, that means these borrowers defaulted. And, while it looked like the bank’s assest have increased in value (since the loan amount had escalated), its collateral was much less than it needed (since the care depreciated as the loan amount increased). As was true for most of these Option ARM home bu
loans that “converted”.
Well, BankUnited certainly enjoyed just such a banking “success”. And that means, the bank ended up failing in a big way. Tomorrow, in Part III, we’ll talk about how the new owners (the ones to whom our government sold this bank) are going to make a killing on this bank purchase, compliments of the FDIC and with money sucked from every US taxpayer.
