Wednesday, December 24, 2008

More about banks and bailouts

Dec. 24, 2008

I read in the South Florida Business Journal:

BankUnited Financial expects $327M loss, gives cautions about future

BankUnited Financial Corp., the holding company for the largest bank based in Florida, expects to lose at least $327 million in the fourth quarter and warns of "substantial doubt" of its ability to operate as a going concern if it fails to raise capital.

In a notification of late filing with the Securities and Exchange Commission on Tuesday, the Coral Gables-based parent of BankUnited (NASDAQ: BKUNA) also acknowledged that the SEC’s Miami office began an informal inquiry into the company in October.

Bank United said it could not file its financial statements for the fiscal year ended Sept. 30 by Dec. 15, the SEC's usual 45-day window, because of adverse market conditions and an additional review of complex accounting and disclosure issues. That review is examining the company’s regulatory issues, liquidity and capital.

One discovery made by the bank is that it misclassified $449 million from securities sales as investing cash flows when they should have been classified as operating cash flows. The mistakes were made over a two-year period that ended Sept. 30, 2007.

The bank said it would restate its consolidated statement of cash flows if the mistake is determined to be a material event.

However, that accounting change would not impact cash, net income or earnings per share, the bank stated.

Bank United said it expects to file its annual report with the SEC sometime in January.

In a research note to clients Wednesday, Raymond James associate analyst Michael Rose said BankUnited appears to be in a "race against the clock in its efforts to survive." He maintained an underperform rating on its shares that encouraged investors to sell.

After signing a cease and desist agreement with the Office of Thrift Supervision in September, BankUnited has been working with federal regulators, who placed restrictions on its business practices and set a Dec. 31 deadline for the bank to raise its capital-to-asset ratios.

BankUnited, which previously said it was seeking $400 million, continues to seek more capital through an asset sale or an equity investment. The bank stated that if it does not raise the money by the end of the year, it doesn’t expect to meet the capital ratio requirement and could face “various enforcement actions regarding the bank” from federal regulators.

“We are in negotiations with a fund to raise capital and restructure our balance sheet,” BankUnited stated in the filing. “We cannot assure you that these negotiations will be successful. If such negotiations are not successful, there is substantial doubt about our ability to continue as a going concern.”

Philip van Doorn, senior banking analyst for The Ratings in Palm Beach Gardens, said BankUnited faces significant challenges in raising capital. It would be unlikely to receive federal aid, and it is hard for a potential investor to evaluate the bank's finances when it's having difficulty preparing financial statements, he said.

"A potential acquirer looking to expand its deposit footprint into BankUnited's territory might find other opportunities to acquire one or more healthier institutions," van Doorn said. "The potential acquirer could also wait until BankUnited or another local institution fails, so they could scoop up deposits and branches on the cheap, without being forced to take on the failed institution's bad loans."

After losing $209 million over the first three quarters of its fiscal year, BankUnited's holding company said it expects a loss of $327 million in its fourth quarter ended Sept. 30. That loss would be greater than the $261.6 million loss its BankUnited savings and loan subsidiary reported to the Federal Deposit Insurance Corp. for that quarter.

However, BankUnited cautioned that the holding company’s loss could grow “substantially larger” when it completes an analysis of how much it should reserve for loan losses to cover its payment option adjustable-rate mortgage portfolio.

These types of loans, where borrowers can pay less than the monthly accrued interest and let the balance grow, were major factors in the downfall of Washington Mutual and Wachovia Corp. this year.

“If the final earnings analysis results in a material level of additional losses and we are unsuccessful in our negotiations with a fund to increase capital, there is substantial doubt about our ability to continue as a going concern,” Bank United stated in its filing.

Bank United’s liquidity improved, as it had cash and equivalents of $1.2 billion as of Sept. 30. The bank’s management stated it believed there are enough liquid assets to meet the potential demands of customers “in an environment where financial institutions have experienced unexpected withdrawal rates.”

However, the holding corporation has a potential liquidity issue after pumping $80 million into the bank during the fiscal year and the cease and desist order prohibiting it from taking dividends from the bank. As of Sept. 30, the holding company had $28.4 million in liquid assets against $5.3 million in annual administrative expenses and $16.2 million in corporate debt that can’t be deferred.

The Bank United holding company has sufficient liquid assets to meet its obligations for about 16 months, but it can’t be assured that it can make debt payments once those assets are depleted, the company stated.


It seems like centuries ago, when I was called one day by a representative of Bank United who announced me that from that day on I wouldn't be able to send Bank United any more mortgage transactions.
I was at that time working as a mortgage broker, doing what I could to work honestly in an environment that I didn't seem to understand very well.

Bank United needed at least a deal every month, in order to accept to work with me! (or was it three deals? I don't remember exactly)

My frustration didn't last more than a few minutes, though.

I had in my lenders portfolio hundreds of other banks competing for my small business. Thousands of programs, conventional programs, Alternate-A, A-minus programs, B-lenders, C-lenders, sub-prime, hard lenders, you name it. A dizzying array of ways to lend money to all sectors of society; good credit, fair credit, bad credit, zero-down-payment, foreign national buyers, refinance, jumbo loans, investor loans, each lender with hundreds of possibilities.

The new denominations given to these new categories, as I understand it now, were some of the gimmicks used by many lenders to label and package their mortgage loans for sale to US and international investors. (do you mean suckers?)

I have been a bank manager in my youth. I thought I knew something about lending money to people and businesses. I have even studied this as a career.

I remember that there was a basic consideration when I was taught to underwrite, authorize or deny a loan: the borrower's capacity to repay the loan. Another element was the extent of the hard assets of the client, as well as the verification of the guarantees given by the borrower.

I guess the teachers of my generation didn't know anything about how to become a multimillionaire in a much easier way.

I wasn't a very successful mortgage broker during that period, I confess. It was the only time in my life when I wasn't one of the best at what I was doing.

Reading this kind of news is not a sweet revenge. Just a recollection.

Welcome to the Bailout era.

Henry B. Nathan is a Florida Real Estate Professional. Please visit my website: to search for

Florida Condos, Hallandale Condos, Aventura Condos, Hollywood Condos, Sunny Isles Condos

Thursday, December 04, 2008

The Fallout of a condo conversion

Reflections on a case study.

Just two or three years ago, some of the hot products that we could offer as affordable housing were these condo conversion communities, so popular in Miami and Broward counties. There seemed the best deals available; the developers provided assistance by offering office space to loan officers from mortgage companies and banks, so they could directly assist their buyers in securing the loans.

These were the happy times of the 100% financing, with developers assuming all closing costs, countless “incentives” such as paying off the first six months or the first year of condo maintenance fees, “upgrading” the converted condos with stainless steel appliances, redoing the floors, the cabinets, you name it.

The condo conversions are basically rental properties with a few or hundreds of apartments, which are bought by a developer. Going through legal procedures, making some required physical work on the property, would allow the investors to change the legal status of the rental community from one property to many independently owned “condominium units”.

Starting around 2000/2001, this was one of the hottest markets for builders and real estate investors. Properties bought at an average of $ 60,000 or $70,000 per unit, (this is just an example), would be sold at prices hovering in the $ 200,’s to $250’s and even more. Commissions paid to real estate agents were attractive and everybody seemed quite happy with the situation. Key elements were the organizations put together by the developers to market and sell their products, as well as the surprising complacency of the lenders.

Buyers seemed happy. Buyers signed the developers’ contracts with small deposits, which often left no room for mortgage contingency after 30 days. But in general, everything moved smoothly and new homeowners were happily occupying these units by the thousands. Everybody thought that it was a wonderful way of “accomplishing the American dream of homeownership”. This went on till about the end of 2006, dragging through the first months of 2007.

Fast forward to November 2008. I get a call from a prospective client who wants to be shown a condo she located on my website. I review the listing and find out that it is situated in a well-known condo conversion in Pembroke Pines , which name I remembered from the height of the “bubble”. In 2006, a two-bedroom unit at this community was selling at around $ 250,000.

The prospective buyer pointed out three more listings in the same complex.
All four units are short sales or bank-owned foreclosures.
I set up the showings and meet my client at the place.
I notice immediately a profusion of signs on many units: mainly AUCTIONS posters, foreclosure notices, real estate “for sale” signs. It looked like almost everything there was for sale.
I show the condos and in many of them, close to the back doors, small ant’s mounds were the sign of blight and abandon. Some of the units hadn’t been occupied for months, as evidenced by the state of carpets and bathrooms.

The area is convenient; the general condition of the buildings is good. So what’s wrong?

The actual asking prices varied between around $ 90,000 to $ 110,000. After talking to the listing agents, I have the impression that they hadn’t received too many offers and my feeling is that these places could go for as low or even less than $ 80,000.

That’s about a third of what they were selling a little more than two years ago. Unbelievable? Not quite. That’s the point.

Who can afford these modest $ 80,000 homes? Traditionally, and as per the criteria of Fannie Mae, somebody whose family income hovers in the monthly gross $3,000. (No more than 28% of the gross income can be dedicated to pay for the monthly mortgage, insurance, taxes)
When they were valued at $ 250,000, this monthly income should have been in the $7,000. Otherwise, buyers could have been in trouble sooner or later. But nobody was paying attention, apparently

And this is the real problem.

People who can only afford $80,000 homes, living in $80,000 homes, but having to pay $250,000 mortgages.

Consequences? Many choose to run away. Not only because they feel cheated, but because they make just enough money to pay for an $80,000 home.

Did you get it yet?

Weird? As in most business transactions, when somebody loses, somebody else wins. Let’s analyze this.

The real winners:

- Investors, who purchased large rental properties and converted them to condos at the beginning of the “boom”, sold them very quickly, with high profits. Often after some basic improvements, and large amounts of paperwork, they would convert rentals previously valued at 60 or 80,000 dollars, into units that sold at $ 200,000 and more. These apartments were giving a fair return on their investments to their previous owners, who grabbed the chance to cash on the valuation of their property after many stagnant years.

- Other winners: Mortgage brokers, mortgage bankers, appraisers, who got fat fees and commissions.

In the second and third round of this “bubble”, things gradually changed. Developers started to increase their commissions to attract realtors, frantically arrange easy loans, and put together all kind of creative “incentives.”

Those developers who moved fast managed to sell out. The rest was stuck with a large percentage of their condos, and then their financing banks started to worry.
The last phase was fairly recent: banks foreclosing on developers of dozens of properties, or at least on the high percentage of unsold units.

Of course that due to many different situations I cannot generalize and simplify. Many appraisers, realtors, mortgage brokers, banks were the beneficiaries while it lasted. They had cooperated with these savvy developers who made most of the profit.

The big losers?

- Those homeowners who had bought and walked away, leaving the bank to foreclose on their mortgages, experienced an irreparable damage to their credit that will compromise for a long time their ability to purchase again a home.
- Real estate investors, who bought properties, hoping to get rich by “flipping” in the short term. Many of them let the banks foreclose. They have paid for some time the mortgage, the taxes, and the maintenance fees. At a certain point, they have given up.
- The banks and mortgage lenders, of course, who will recover only a small percentage of their loans.
- Fannie Mae, Freddie Mac and other GSE’s who bought these mortgages.
- The buyers of all the bonds and other real-estate-related financial instruments; which could be foreign banks, a hedge fund, a sovereign-fund from an oil-rich country, or a Singapore investor.

Who is guilty?

A key element was the acceptance by lending institutions of unreasonable increases in appraisal values, which had no basis other than speculation.
Nothing can explain that a home built 30 years ago increases 300% in value in a two-or-three-years period. Nothing can validate it.

Of course that the process fed on itself, causing inflationary building costs, but this was not at all sufficient to justify the incredible raise in the appraisals. Banks took the word of appraisers for granted, ignoring common sense. It was enough that two properties in the same neighborhood had sold at unusually and speculative high prices to allow an appraiser to use them in his “comparative analysis”. And from then on, every house in the area could automatically be the beneficiary of a new value based on this “analysis”, and so forth.

Banks would not object on the evident fallacy, and loans kept originating at a maddening pace. Buyers who had never saved a penny for a down payment, were granted homes they couldn’t afford, thanks to negative-amortization loans that would let them live in their new homes for a couple of years, until the inevitable happened. Naturally, mortgage brokers, lenders agents, everybody, would go along and perhaps encourage these appraisals. What about these “no-income-verification” loans? Did anybody doubt that they could sometime become the perfect instrument of deceit, fraud, and misrepresentation? Complicity? Collusion?

How many objections did we hear from Fannie and Freddie, the most expert institutions in the US on mortgage matter? How many voices of reason from Wachovia, Countrywide or Bank of America? Their executives were perhaps too busy showing their shareholders their prodigious short-term balance-sheet results, and cashing their even more prodigious bonuses, while ignoring the fundamentals.

It was a vicious and unending circle of madness, which results we are living now.

Henry B. Nathan is a Florida Real Estate Professional. Please visit my website to search for

Florida Condos, Hallandale Condos, Aventura Condos, Hollywood Condos, Sunny Isles Condos