The Option Arm Triplets: Dead Banks Walking

I am continually surprised that people are willing to hold, at any price, the common stock of regional Option-ARM mortgage disasters Downey Financial (DSL), BankUnited Financial Corporation (BKUNA), and FirstFed Financial (FED).  They are dead banks walking. The big investment banks, money center banks, insurance companies, and even the GSEs have been drastically writing down the value of their toxic mortgage portfolios. Some might argue they have not written them down enough, but clearly management is at least trying to estimate the value of their portfolio. These big institutions, like AIG (AIG), Citibank (C), and Lehman Bros (LEH), also may benefit from government bailouts and foreign fund white knights who want to buy their name brand to break into the US market.

None of these long-shot saviors exist for the three small banks that I like to call the Option Arm Triplets: Downey Financial; FirstFed Financial and BankUnited. These banks are all loaded to the gills with perhaps the most risky and insane mortgage product ever devised in the recent speculative bubble: The negative-amortization ARMs, more commonly referred to by the more cheerful industry euphemism “Option Arm” or “OA.” For some borrowers, even the risky interest only [IO] mortgages still provided for too high payments. So these mortgages provide them with, in theory, the “option” of making several different payments each month: the full 30-year payment rate, an interest only rate, and lowest of all a minimum payment that doesn’t even equal the loan’s interest. In fact, well over 70% choose to make the minimum payment each and every month, causing loan balances to grow even as property values decline.