Now you tell us…
Flipping through the 10-K that Bank United (BKUNA) filed late yesterday, I found myself doing a double-take when I got to this sentence on pg. 49:
Forty-two percent of our one-to four family residential loans were underwritten based on borrower stated income and asset verification and an additional 9% were underwritten with no verification of either borrower income or assets.
Beyond the shocking nature of the numbers, which it’s hard to get past given that over 50% of their residential loans were made on what some of us might call wishful thinking, is the fact that this appears to be the first time that Bank United is actually disclosing this in its public filings. Certainly seems like something that an investor might want to know, say, before the stock began its freefall — declining by more than 70% so far this year. The company goes on to say that “While these loans generally represent more risk than full documentation products we compensate by requiring higher credit scores, lower LTVs, lower-debt-to-income ratios and additional employment/ business information.” Still, I’d imagine it would be a lot easier to fake those sorts of documents, than, say, a W-2, or 1040.
Bank United, as the company notes somewhere else in its filing, is one of the most heavily shorted stocks. That, by the way, is a new disclosure too: it’s the very last risk factor.
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November 30th, 2007 at 6:07 pm
Good find,but, I wouldn’t discount the last line as much as you are:
“While these loans generally represent more risk than full documentation products we compensate by requiring higher credit scores, lower LTVs, lower-debt-to-income ratios and additional employment/ business information.â€
You can’t fake a credit score and I believe that is a pretty good indicator of the ability to repay debt. Isn’t that why we have credit scores?
November 30th, 2007 at 6:24 pm
I agree that credit scores are important, but (and please correct me if I’m wrong) isn’t that just an indicator of how the person has done at paying their bills in the past?
November 30th, 2007 at 8:37 pm
You are correct. But isn’t that a key factor in evaluating a loan’s quality?
The 4 C’s of credit are:
Character(integrity): the main factor in evaluating character has to be credit score, you are evaluating the credit character or track record of the person you are lending to. They did this.
Capacity(cash flow): how capable are you of paying. We have to go with verifying debt to income and this is one place where BKUNA slacked off obviously. They did say they required lower debt-to-income ratios which is a little better, unless the borrower is stretching the truth.
Capital(collateral,net worth): They did asset verification and they took a higher LTV so are OK on this front.
Conditions(of the borrower): they required “additional employment/business information” so they made an attempt to further evaluate conditions.
They obviously did a less than perfect job of evaluating borrowers, but I think there is a tendency in today’s environment to get carried away with what the effects of this marginal lending will be. Bank’s are built to withstand high stress situations and BKUNA is well capitalized, they far exceed federal capitalization standards. The losses they end up taking in a really bad situation like this still don’t threaten their ability to operate as a going concern. People don’t realize that these earnings losses are in part due to huge loan loss reserves that are being built up. This is basically done to protect capital and smooth out future earnings. When these losses do hit they will be in position to absorb them and at that point will already being moving forward writing profitable business with better standards.
Anyway, I do agree with the point you are trying to make, I just know it is easy to get carried away and sensationalize poor lending that might actually be average to slightly below average lending. The current environment helps fuel this tendency.
December 1st, 2007 at 11:43 am
Point taken — didn’t mean to sensationalize. Just found it interesting that at least based on my review of the filings, this was a new disclosure. And since at its’ heart, this site is about the quality of earnings, more than the quantity, I thought it was an interesting find.
December 1st, 2007 at 12:41 pm
I completely understand where you are coming from, and I found it interesting as well. This is something they should have disclosed up front for shareholders to see instead of hiding it away deep in the 10K. I appreciate your diligence.
December 3rd, 2007 at 2:55 pm
Dan,
FICO scores are in the process of being thoroughly discredited as an indicator of mortgage credit risk. Take a look at the WSJ story today on the subprime loans being handed out to people with FICOs north of 700 or watch the currently unfolding HELOC disaster and see how many 700+ FICOs default. FICO is a very poor metric of Capacity and has no ability to factor in prospective increases in debt load (ie as in buying way too much house for your current circumstances - as is more likely to happen when you have stated income), nor does it take into account resets in morgage rates and what happens when you get to the end of an I/O or option ARM teaser period.
I would be very wary of taking any comfort from the FICO score associated with a mortgage.
December 3rd, 2007 at 7:21 pm
On a somewhat related note, if you missed this story in the NY Times over the weekend about how the crisis is impacting the town of Narvik, Norway, it’s definitely worth the read. I particularly liked the line about how just because they’re in the middle of nowhere — well, above the Arctic Circle — they’re not stupid.
Nearly 20 years ago, I spent about a gazillion hours on a train to travel to Narvik and it was a truly amazing place. The people were incredibly friendly and welcoming. And the midnight sun was fantastic — I have a pix of me overlooking the Narvik harbor at around 11:30 pm and it looks like mid-day. To think that this city wound up on the receiving end of some overpriced real estate in Florida and other places is pretty sad.