BankUnited Financial Corp. in Coral Gables, Fla., has been trying since May to raise capital to gird against losses in its ailing single-family mortgage portfolio, but so far it has failed.
And even if it succeeds, an analyst said, BankUnited could need 50% more than its goal of $400 million to cover future losses from scores of adjustable-rate mortgages that are getting ready to reset.
Analysts also are skeptical that a plan BankUnited unveiled last week to move borrowers with adjustable-rate loans into fixed-rate ones would work, because many of the borrowers have too much debt and too little equity in their homes to qualify for the fixed rates.
The $14.2 billion-asset BankUnited could bail itself and its investors out by selling itself to a healthier company, but analysts said finding a willing buyer could be a challenge, given its problems with asset quality and the high levels of jumbo certificates of deposit on its balance sheet.
"Time is of the essence for this company to raise equity capital," said Gerard Cassidy, a managing director at Royal Bank of Canada's RBC Capital Markets. "They need a large amount of it, and in the capital markets today, it's not as easy for a bank with asset quality problems to raise capital."
Albert Savastano, a research analyst with Fox-Pitt Kelton Cochran Caronia Waller, estimates that BankUnited would need at least $600 million to shore up its capital base.
It has lost $183.5 million this year and nearly 8% of its loans — or $982 million — were nonperforming at June 30, versus 0.95% a year earlier. Analysts who follow BankUnited say that ratio is likely to keep increasing, since hundreds of millions of dollars in option ARMs are slated to reset over the next 13 months.
BankUnited's shares have lost just over 90% of their value over the last year and are now trading at just a small fraction of their book value. The shares closed at $1.40 Thursday.
During an earnings conference call last week, BankUnited officials did not accept questions, saying the company is in a "quiet period." The company did not return calls seeking comment on the loan modification plan.
BankUnited has stopped originating option ARMs with low or no documentation, and now the only mortgages it is originating are those it can sell on the secondary market. It is also making more commercial loans.
But option ARMs still make up roughly 57% of its $12 billion loan portfolio, and most of the loans are in Florida, one of the states hardest hit by the real estate downturn. The loans are causing problems for BankUnited because homes are worth less now than when the loans were made, so as loans have reset, borrowers have opted to walk away rather than pay higher monthly payments on lower-valued properties.
In a news release announcing its earnings last week, BankUnited said that 40% of its nonperformers are covered by mortgage insurance.
What concerns analysts most is that so many loans have gone bad when less than 1% of BankUnited's option ARMs have reset. By Sept. 30, 2009, 7.2% of the loans are slated to reset.
Last week BankUnited unveiled a plan to slow the growing pile of bad mortgages by moving "thousands" of borrowers with adjustable-rate loans into fixed ones. As part of its mortgage assistance program, it also said that it would waive prepayment penalties and keep fees for loan modifications to a minimum.
"This is one of the most sweeping, broad-based programs of its kind," Ramiro Ortiz, BankUnited's president and chief operating officer, said in a press release. "This program will literally provide people with a map to find their way back into a more financially stable environment for their home mortgages."
Mr. Savastano said it seemed unlikely BankUnited would be able to refinance customers' loans without taking a significant "haircut."
It must first get "an updated appraisal on the home to find out what it is worth," he said. "Take 80% of that and make a new mortgage. Then the ultimate question is whether the borrower can afford that or not."
In Mr. Savastano's analysis of BankUnited's quarterly results, he said that in the worst-case scenario, it could face losses of 18% to 36%, or $1.3 billion to $2.6 billion, on modified loans.
By regulatory standards, BankUnited is well capitalized. As of June 30, its Tier 1 capital ratio was 7.6% and its total-risk based capital ratio was 13.8%. During its fiscal third quarter, which ended June 30, the company contributed $80 million of capital to its thrift subsidiary. The company is also preserving capital by suspending dividend payments on its common stock.
But projected losses are expected to eat away at its capital as the underlying value of collateral falls and the number of defaults increases; the more its capital levels fall, the harder it will be to raise capital, analysts said.
In a research note issued this week, analysts at First Horizon National Corp.'s FTN Midwest Securities Corp. wrote that if BankUnited manages to raise the capital it needs and survives the credit downturn, investors could be well rewarded. However, "the company's credit issues may prove too dire to overcome" if it fails to raise the capital.
"We continue to question whether … [BankUnited] will succeed in raising the necessary capital," the note said. "We would not be surprised if the company is following a dual track of trying to find an acquirer to bail out existing investors, though we are equally pessimistic on the prospects of a buyer."
