FDIC Shuts Down NetBank Due to Defaults
 

FlyerTalker's make sure you got your miles before this happened!!



FDIC Shuts Down NetBank Due to Defaults
Friday September 28, 6:27 pm ET
By Alan Zibel, AP Business Writer
FDIC Shuts Down NetBank Because of Excessive Level of Mortgage Defaults

WASHINGTON (AP) -- NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an excessive level of mortgage defaults.
It was the largest savings and loan failure since the tail end of the industry's crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

Customers with less than $100,000 deposited with NetBank will be protected by FDIC insurance.

While dozens of mortgage companies have closed due to soaring defaults of home loans made to borrowers with weak, or subprime, credit, those problems previously had occurred among non-bank lenders such as New Century Financial Corp. NetBank, in contrast, is federally regulated.

Loose mortgage standards in recent years -- especially among lenders catering to subprime borrowers -- have resulted in a spike in home loan defaults.

Bert Ely, a banking consultant based in Alexandria, Va., said NetBank was in "deep trouble" before the subprime mortgage market's woes accelerated this year. Regulators, he said, "should have closed it a long time ago."

While some Internet-only banks are successful, he said, operating one without retail branches can be a difficult strategy to maintain.

The FDIC said Friday that $1.5 billion of NetBank's insured deposits will be assumed by ING Bank, also a major online bank that is part of Dutch financial giant ING Groep NV. ING will pay $14 million for the deposits and receive 104,000 new customers.

NetBank, which had no physical branches, sustained significant losses last year "primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies," the Office of Thrift Supervision said in a statement.

The FDIC said NetBank had $2.5 billion in total assets and $2.3 billion in deposits as of June 30.

The OTS oversees about 830 savings and loan institutions, or thrifts, ranging in size from giants like Seattle-based Washington Mutual Inc. to small community banks. By law, thrifts must have at least 65 percent of their lending in mortgages and other consumer loans.

The last major thrift to be closed by regulators was Superior Bank of Hinsdale, Ill. It had total assets of $1.9 billion and was shut down in July 2001. Its failure has so far cost the FDIC's insurance fund an estimated $273 million.

In June 1993, regulators shut down Western Federal Savings and Loan Association, which had total assets of $3.8 billion. That thrift's owners included former Treasury Secretary William Simon and former Federal Reserve Board Vice Chairman Preston Martin.

NetBank had reached a deal to sell its deposit accounts and other assets to privately held EverBank of Jacksonville, Fla., but EverBank announced this month that the deal fell through.

EverBank in July completed its acquisition of NetBank's mortgage servicing business, and the FDIC said Friday that EverBank will purchase about $700 million in mortgage loans.

"Customers of NetBank should have confidence and security knowing that they will have access to their insured funds in a timely and orderly manner," FDIC Chairman Sheila Bair said in a prepared statement.

The FDIC insures bank deposits of up to $100,000.

NetBank had $109 million in deposit accounts that exceeded the FDIC limit. Those customers will become creditors in NetBank's receivership, the FDIC said.

The FDIC has a toll-free number for customers affected by the failure:1-888-256-6932.

I have/had used Netbank for several years without issue, but when the sale to Everbank fell through, I went ahead and opened another account elsewhere just in case....now glad that I did.

Although I do still have some funds on deposit at Netbank, it is important to note that those funds are still available and usable either via ATM/Debit card or checks. I ran a couple debit card transactions just to be sure and there was no issue there. Bank website is offline but is supposed to re-open later in read only format and return in full Sunday evening. The only thing that has been restricted at this point is online bill pay which is disabled. I spoke to ING as well as the FDIC group handling this and so far it seems they are trying to do what is best to get things switched with minimal impact to customers.

That said, I have already initiated a transfer to get the rest out so I don't have to mess with it going forward. I can only hope that those with deposits over the FDIC insurance thresholds fair as well as those that are covered.

I do also wonder about the mechanics behind all this. Since they were shut down by Thrift, I wonder how ING ended up getting the deposit accounts (for a $10 Million charge) rather than forcing FDIC insurance to kick in. The article mentions assets and deposits, but it doesn't mention liabilities which I would think would be an important number to the scenario.

Don't forget that deposits are typically one of a consumer bank's largest liabilities. Loans that a bank have issued are it's assets. It's kind of backwards to think that way, but it's the way it works, trust me! :)

The FDIC has several tools available to settle depositors accounts. One would be to simply write everyone a check. Another is to hold a very quiet auction and turn the accounts over to the the winning bidder. In this case it appears that ING bid $14 million for the deposits and related customer info. ING was willing to pay for deposits which are, as EchoVictor pointed out, liabilities in order to gain the customers. (At least as many as will stay around.)

One of the advantages here is that the FDIC avoids most of the administrative hassles of paying out the accounts, not to mention that it reduced its potential loss by $14 mil.

So are we able to initiate a transfer to another bank account with no charge at this time, to get our money out?

Will we be able to just shut down the account if we don't want an ING account? I was planning on closing this account anyway.

not necesseraily.

deposit is a liability only if its used as loan. Hence its a wash.

deposits for a bank that are not matched to a loan is known as an asset payable on command.

BTW, let me teach you something if you dont already know: you aware that the Federal Reserve is a private bank?

Lastly the FDIC has no authority to shut nobody. The OTS does.

Yes, you can transfer out with no issue...unless you have over $100,000 there in which case additional paperwork would be necessary.

Thanks to everyone for the banking lesson, never really delved into how banks structure themselves.

From what I have gotten from ING, they will obviously be taking over everything, but for the time being, account and routing numbers are not changing, meaning business as usual for most. If you have deposits to mail in, they should still be addressed to the same addresses and account references as before. Website is open again, but will not be transaction enabled until Sunday.

The way it works is that once OTS deems the bank insolvent FDIC (which is an insurance) will determine which accounts are subject to the regulatory maximum which can vary. Once they figure out the amount that THEY owe you, your monies will be transfered to another instituion with arrear interest.

For excess monies NOT covered by FDIC the timing is a pain as OTS enters the bank, fires management and keeps creditors at bay. IF deemed not solvable they will disolve the assets and you would be a creditor (third in line, behind preferred stock and trust preferred issuances). This takes time especially if it is not fraud related bankruptcy.

The good news is that histroically 97% of bank insolvecies result in consolidation, but again it takes time to evaluate value and take over/purchase process. Rule of thumb is that if you exausted FDIC limits your in trouble, as the conolodiation may not be obligatory of redemption of excess FDIC non insured deposits, this is called purchaser goodwill to make you whole.

Good Luck

Not the case per se. FDIC can insure up to 600,000 based on account structure.

This might be a good time to consider a BankDirect account. :D

I still have referrals if anyone wants one (each of us get an extra 1000 AA miles by using a referral, in addition to all the other bonuses).

(You can do a $500 visa/mc purchase for initial funding, plus 1k miles for opening the account, 1k for referral, 5k for direct deposit, 2k for bill pay for a year. That's 9500 miles plus 100 miles per month per $1000 balance.)

That's ironic.

I had opened an account with NetBank when it first opened in the late 90s (as I recall), and used it for on-line bill pay for credit card accounts and the like. It was very handy when it worked right, since the payments were by EFT and deposits could be made cost-free using their business reply envelopes. I figured they had a good business model (and judging from the banks that have followed suit, it appears they did).

I lived with their growing pains, and was pretty satisfied on the whole until late last year when because of some unknown glitch the access to my account was blocked for nearly a month. Of course, you couldn't get it "unfrozen" on the phone, and you couldn't log into your account to get it unfrozen that way.

When the mess finally got sorted out, they couldn't give a good explanation of what happened, nor was I satisfied that they had it under control and something similar wouldn't happen again. ING Direct had a good reputation, and were just starting their "Electric Orange" bill-pay program, so I closed the NetBank account and switched to ING's Electric Orange.

Now it appears everyone else is following me, but without planning to.

P.S. For those of you who do not already have an account with ING Direct, you might want to open one now (since it looks as though you're soon going to have one created for you anyway) to get the $50 bonus. See link. Hurry, though -- offer expires 30 September.

My long run problem is using the Netbank ATM card overseas. I expect that in the next 90 days my ATM FX conversion fee will go from 0% to the 3% ING charges. Due to my travel patterns, the ATM conversion fee and ATM fees have a far greater impact than a low FX fee credit card. I am considering Everbank (1% FX fee). Any recommendations ?

PS I have been rereading the fantastic wiki. Great info on FX fees.

PPS Off topic - Since I will need to get a new bank, I am also reviewing credit cards. I have a credit union Visa card with the 1% Visa fee and a Starwood Amex (2% FX offset with Starwood points). The Capital One cards seem the best for FX but there seems to be a large number of complaints posted on the Internet. Any feedback/recommendations?

Cap One is definitely a rougher ride, but to me worth the trouble.

First the bad. Seems all csutomer service is overseas and the most of the reps Ive spoken to are not very well plugged in. Also, the first time I went overseas, I couldn't get a charge approved, even though I had called in advance, gave them my travel dates, etc. After a while, I found that if I call their security number (as if I had lost my card), I get US based folks, and they usually take down my info and allow the charges to be approved. Even they failed to set me up properly once, but once they realize that I'm taking names and following-up, they can and do get it done.

The good is that I'm saving the 3% fee and getting 1.25% cash back. With other cards, I'd pay the 3% and get a FF mile, which is worth about the 1.25%. And for 3% cash savings, I'll put up with the hassle.

Great idea! I will receive the $50 and get to try out the ING product line immediately.

Following the link, I see that the ING offer has been extended to Nov. 30.