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You’ve probably never heard of BankUnited until now. This fairly small bank has been trying hard to make you learn about it; it is about to become the second largest bank failure ever (in the US) after IndyMac. IndyMac should have served as the absolute 10 alarm fire, but our government regulators waited for ninety more days with their eyes closed to react to the conflagration in October 2008).
BankUnited was formed in Coral Gables (FL) in 1984 as a state bank and then became federally charted in 1993. At that point, this small bank was the largest financial institution with a Florida headquarters. It had been a conservative bank with a predilection for residential real estate.
During the period when small and mid-sized banks were being acquired left and right, this one was just left. I think BankUnited felt snubbed, but I have not spoken to them (except for the fact that my mortgage is held by them). In any event, after being left at the alter (or maybe they just habituated the wallflower’s chairs at the wall), they decided to become snazzier. By the beginning of the 21st century, this bank had become known as the queen of the Option ARM’s.
An Option ARM (not relegated only to mortgages, several car companies tried to push this on me when I was buying vehicles) “lets” the borrower choose how much to pay the mortgagor every month. The problem is the minimum payment usually does not cover the interest due on the loan, let alone any principal repayment.
Let’s use an example. You elect to borrow $ 10,000 to buy a car, with a term length of 10 years. Before we include interest, that means you need to pay $ 1000 a year to cover the principal. If the interest rate was (a very simple) 5% [such simple rate never, ever exists for car loans, but humor me], it would mean you would owe $ 500 interest on the loan for the first year. But the minimum payment the bank requested for the loan was only $ 400. That means if you paid just the $ 400, you would now owe $ 10,100 by the beginning of year two. (You have not repaid any principal- and you did not cover the full amount of the interest due for the loan.) This is negative amortization, in a nutshell.
Now, that we know about negative amortization, we’ll study the BankUnited case in more detail tomorrow.
One definition of insanity is doing the same thing over and over again and expecting a different result. To me, the American banking system is one of the greatest challenges that America has and the economists keep spinning b.s. and thinking that the problem will get fixed. America is a wonderful country but … there seems to be some problems around money and has been for a long time. Keep the info up but until the way banking is done in the USA, I think this may continue to be a challenge for Americans.
I am not saying it is better elsewhere but I know that I don’t seem to experience the challenges here that my brother does in the US. Good luck
Roberta Well, Roberta- wait till you see the next two articles in this series. It will demonstrate how insane the system really is. Thanks for your thoughts, RAAckerman