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Catching a Falling Financial Knife

Credit Crunch Cancer Metastasizing

Companies / Credit Crisis 2008 Sep 01, 2008 - 01:14 AM GMT

By: Money_and_Markets

Companies

Best Financial Markets Analysis ArticleMartin Weiss writes: First, the subprime mess clobbered subprime lenders like Countrywide Financial.

Then, the cancer spread to America's largest banks that invested heavily in risky mortgage-backed securities.

Now, it's metastasizing again — spreading to regional and state banks as well.


Two prime examples: Integrity Bank of Alpharetta, Ga., which just failed Friday with nearly a billion in deposits ... plus an even larger bank in trouble: BankUnited Financial Corp.

BankUnited is Florida's largest bank with 85 branches in 13 counties and with total assets of $14.2 billion.

In the first three quarters of last year, it reaped a profit of $23.2 million. The first three quarters of 2008? $200 million in losses!

Why? Because a whopping 58% of the bank's "assets" are option ARMs.

Like other adjustable-rate mortgages, option ARMs lure in unqualified homebuyers with bargain-basement interest rates ... then jack up rates — and loan payments — in later years. What's worse, each month, an option ARM gives borrowers three choices:

Option #1. Pay principle and interest normally.

Option #2. Pay interest only.

Option #3. Make a bare minimum payment that doesn't even cover all the interest due.

What happens to the unpaid interest? It gets tacked on to the unpaid balance.

The big time bomb: Borrowers are only allowed to do that for a pre-specified period of time or until their loan balance rises to a certain threshold, typically 110% or 115% of the original loan amount.

When that happens, they have to make the full payment — principle AND interest ... which can be many times higher than the minimum payments.

That's why massive numbers of borrowers are choosing a fourth "option" which no one anticipated: No payment whatsoever . In other words, DEFAULT.

And that's also why ...

The Amount of Non-Performing Loans At BankUnited Has Surged 770% Just in the Last Twelve Months!

And if you think that's bad, the loans the bank doesn't expect to be repaid has soared a staggering 1,964% since this time last year.

Meanwhile, the non-performing loans in BankUnited's portfolio are rising at the rate of 10% per month — and the number of foreclosures in the bank's inventory is up 18% in July alone.

Now, the government is demanding that BankUnited raise $400 million of new capital and offset losses on its $10 billion of home loans.

Bottom line: BankUnited's stock is already down 91% in 12 months. And analysts are warning that it's likely to fail!

BankUnited Is DEFINITELY Not the Only Bank in This Soup!

If BankUnited were an anomaly, it wouldn't be such big news. But the fact is, the cancer that's brining down Florida's largest bank has also reached a raft of other financial institutions stuck with massive amounts of option ARMs.

  • At Bank of America , the $25.4 billion in option ARMs it acquired when it bought Countrywide are sinking fast. A whopping 72% of the borrowers aren't even paying all the interest due on these loans. One in eight is at least ninety days late on payments.
  • At Wachovia , the story is similar: Wachovia bought Golden West Financial at the peak of the real estate bubble in 2006 and as a result now has $122 billion of option ARMs in its portfolio — a staggering 25% of its total assets. Some 14% of those option ARM customers already have zero — or negative — equity in their homes. And that's only going to get worse as home prices depreciate further.
  • And at banks all across the country , we see the same pattern.

This is why we've repeatedly urged you to take two crucial steps while you still have time ...

FIRST, to achieve true safety for your money, don't wait one more day to take the steps we set forth for you in our recent "X" List video .

SECOND, once you've got most of your money — even as much as 90% — in safe, conservative investments, seriously consider using hedges such as inverse ETFs or put options — designed to soar in times like these — to help protect your investment portfolio.

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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Comments

pete
05 Sep 08, 20:58
defaults

The only two tragic things in all this is;

1. The whores in D.C. keep giving BILLIONS to the terrorist nation of Israhell and, 2., they'll bail out their buddies with tax-payer dollars. Lastly, after they've killed the goose that laid the golden egg,...they'll Jet to their new resort called Dubai before the ignorant (m)asses in this sewer wake up and vent their rage on 'em.


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Catching a Falling Financial Knife