'We Can't Make Money': Why BankUnited Ditched Retail Mortgages

Executives at BankUnited in Miami Lakes, Fla., decided to abruptly pull out of retail mortgage origination after realizing the unprofitable business had shown no signs of turning the corner.

"We can't make money in the business," John Kanas, BankUnited's chairman, president and chief executive, said during a conference call Thursday to discuss quarterly results. "Our job is to allocate resources … and put all of our efforts into the areas where we can make money and where we think the least amount of risk is."

BankUnited entered retail mortgage origination about two years ago as a part of broader strategy in residential lending, where it is also a warehouse lender, correspondent aggregator and servicer, said Rajinder Singh, the $24 billion-asset company's chief operating officer.

While retail mortgage lending "was growing nicely, it's a very thin margin business," he said, adding that the business averaged about $20 million in monthly originations.

"We realized this was the lowest-margin, most volatile business we had and we decided that we should exit this channel," Singh said. "This business requires a lot of scale, and even if we had grown this two, five or 10 times the size of what we had, it would still not be a big contributor to earnings. It was not very strategic for us."

Singh said the company has a pipeline of retail mortgages that it will close in coming months.

BankUnited is doing well in its other residential mortgage businesses, and Singh said he expects the warehouse business to continue to grow this year.

Kanas led an investor group that bought BankUnited from the Federal Deposit Insurance Corp. in May 2009 after the thrift failed largely because of problems associated with payment-option adjustable-rate mortgages.

It was reasonable for BankUnited to throw in the towel on retail mortgages, given a slowdown tied to rising interest rates, increased regulation and a footprint limited to the highly competitive markets of Florida and New York, said Keith Gumbinger, vice president at HSH.com.

"There are probably more productive opportunities to pursue than those presented by the local residential mortgage climate in the narrow geographic area in which they operate," Gumbinger said.

BankUnited's executives made it clear during Thursday's conference call that they are pleased with the company's geography. BankUnited reported a 20% increase in net income from a year earlier, to $56.3 million.

"Thank God we are in New York and Florida and not in other parts of the country that have energy problems to worry about," Kanas said. "We do know, however, that in neither one of our markets are we seeing any signs of stress."

Florida is "continuing to show improving health" as BankUnited focuses on new markets, Kanas said, noting that 40% of the company's fourth-quarter loan growth in the state came from markets outside of Miami. New York, meanwhile, "continues to grow uninterruptedly," he said.