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.

Like Mountain Trader, I have had challenges with Cap One CSRs and their communication skills. That being said, once I got through to the Fraud department before each trip, I've only had them decline two charges, both when I had to overnight in Paris (that's three trips to countires that include Romania, Bulgaria, Turkey, Austria, Germany, Republic of Ireland, England, and two overnights in Paris). The Fraud department has always given me a direct number to call if I had a problem, I just didn't bother to use it since they were single charges on my way home.

For a current account, I have opened a Fidelity cash account.

http://personal.fidelity.com/global/...uestion=mycash

While it is a sweep account for investments, it's FDIC insured, and they rebate all "foreign" ATM fees in the US. Because overseas withdrawls are processed by VISA, there's a 1% fee for them.

I went with them becasue there is also an office in my town. I haven't completed the transition, so still have funds at Netbank, but am transitioning bill pay and direct deposit this week.

Wow. Bummer for netbank customers.

Hypothetical question to the experts:

Savings - 100k
Checking 10k
Owe on Credit Card - 10k

Your total depoists are 110k but only 100k are insured -- so you'd potentially lose the extra 10k. Would they credit that to your credit card payment (in this case, if you normally pay your bills on the 1st of the month, and would have paid off the 10k balance in full from checking, but the bank went under on the 28th... you'd be hosed). How would this work?

For those of you who are thinking about ING accounts, I have used them for years and have nothing but good things to say about them. Enjoy!

Mike

No, depositors do not have a "right of offset".

I opened a NetBank account a few years ago for the UA miles. The interest was never competitive so I closed it a year ago and now have an ING Orange account which pays very nicely. The downside is that the ATM card is essentially worthless - it won't even work at ING banks in Europe.

1. Deposits are always a liability for a bank. It's money the bank owes to someone (the depositor). So my original point was to say that the article is essentially correct when it described NTBK's balance sheet as having xxx in deposits and xxx in assets. The original poster didn't understand this.

2. I know all about the Fed. It is not a private bank. The Federal Reserve is a system and various components have differing legal states. The board of governors is actually a government agency. But yes, the Federal Reserve Banks are ultimately privately owned by the commercial banks in their respective regions, although these shareholders have limited abilities to control these stakes.

3. You are technically correct on OTS/FDIC but you realize they usually act in unison. And if FDIC refused to insure a bank's deposits going forward, this would effectively shutter any bank.

Does this mean that the ING ATM card won't work in Europe, not just that there's a 3% conversion charge and you should tell them you'll be traveling? Any problem with their listed ATMs in the U.S.? I see that they tend to be in convenience stores and the like; the few times I've tried those, it's been hard to make withdrawals in the $300 range as I like.

Before I learned about the ING $50 offer, after looking over the FT wiki I was ready to move my NetBank funds to Bank of Internet, where I've just become eligible for Senior Checking. May I hope that the similarity of their name and nature to NetBank's isn't too much of a concern? For now I think I'll start with ING and may move funds to B of I when a trip to Europe gets closer.

I'm not a depositor at NetBank, but I'm curious about what the prospects of recovery are for those with accounts exceeding the FDIC-insured amounts. Does anyone have a sense for that?

From the FDIC:

http://www.fdic.gov/bank/individual/failed/NetBank.html

In accordance with Federal law, allowed claims will be paid, after administrative expenses, in the following order of priority:

1. Depositors
2. General Unsecured Creditors
3. Subordinated Debt
4. Stockholders

...

Due to the projected sale of assets of the former bank, the FDIC is in the position to provide each uninsured depositor with an dividend equal to 50% of your uninsured amount. These funds will be deposited directly into your account net of your uninsured portion.

My checking and MM accounts are back on line, and bill pay is working. I had nothing uninsured.

Yikes. It looks like a substantial loss of principal is in the cards for the uninsured portion of deposits.

Yes, and it's deliberately set up that way -- in part, so we will spread our and the common risk, and not put "all our eggs in one basket" or something like it. But you knew that. I am actually amazed at the 50% after $100,000, and would never have expected that. Never heard it was part of the FDIC program to so divide up assets. But anyone who's ever been through school and learned about the depression and the subsequent establishment of the FDIC should never anticipate getting this, especially in the event of the real purpose of FDIC. Moreover, it's amazing that anyone would ever keep more than $100,000 in one bank. I could see losing track for a while (up to as long as between tax statements, which would be irresponsible enough) but beyond that.....

(I know, there's the argument that it should be more, considering the value of $100,000 when the amount was set. But let's all hope that what happened here doesn't catch hold, and we find ourselves debating it, or worse.)

FWIW, the FDIC-insured deposit limit for IRA accounts was raised to $250,000 (instead of $100,000) recently (just this year, I believe).

However, I don't know if NetBank offered IRA deposit accounts. Not all banks do -- for example, ING Direct does not.

Thanks. Learned more than a couple of things on FT, today. Everytime I get up on a high horse... Looks like psyflyer, above, says it can be even higher. Didn't have my ear to the rail.

I thought that the FDIC $100,000 limit was the total insured amount not the amount per bank. ie: if you put $100,000 in 10 different banks and they all went belly up you would only be insured for a total of $100,000.

Nope, Rc408. It's $100K per bank. Also, I don't know if it's still true, but I remember an old brochure from the late 1970s (when the limit was $20K, then $40K) which explained that a joint account was counted as a separate person. So John Doe, his wife Jane Doe, and Mr. & Mrs. John Doe get 3 helpings of FDIC insurance @$100K at one bank if this is still true.

Thanks for the info, I assumed it was total. Good to know.

Never ASSUME. You know the saying about that. @:-)

FDIC has a Deposit Insurance Estimator tool on the web --

http://www2.fdic.gov/edie/


It considers the different account ownership types (individual, joint, etc) and allows you to input accounts at multiple banks.

:confused: "..per bank" ??

Seems that a lot of advertising used to tout ".. per account .." ~ did something change?
(not like I'm overtly affected either way ;) )
/.

No, you're just another person who has been making incorrect assumptions about how FDIC insurance works. ;)

From the Electronic Deposit Insurance Estimator tool (EDIE) posted by avlff above:

The Federal Reserve is a PRIVATE BANK. Do you know WHO owns the FED? Why dont you try to look it up? Why dont you look up the fed in the white pages? Its listed right under Federal Express. The Federal Reserve Act of 1913 clearly spells it out, thanks to illuminati cabal of Wodrow Wilson.

Ever heard of inflation? Inflation never existed until the Fed was given authority of printing money and lending to to YOU. FYI, Every penny of your income tax (EVERY) goes to repay Fed issued loans to YOU (and me). How can oyu say, No the Fed is not a private bank but its owned by a consortium of banks that are private... Try to find out WHO owns the private banks and you will be in a big surprise. The fact is that the "central bank" that we know as the Fed is a private bank controlled and owned by few big names (rockfeller, warburg, rothschild, morgan). And this is a FACT. Look it up. Just google federal reserve private bank

http://www.truthusa.org/articles/fed/fedtruth2004.htm

Thanks for reminding me.:D

Thanks for putting that out there psyflyer. A lot of people get confused because of the name and make assumptions (like I did above;)). I believe this was A fight between Jefferson and Hamilton over who would control the money. Jefferson supported the people by wanting the money to be issued by the government, and Hamilton supported the private bankers by wanting the government to have to borrow the money and pay interest on it. Jefferson prevailed until Woodrow Wilson privatized the bank. there is a book about that called "The Creature from Jekyll Island"

That is a GREAT book that goes through the timeline up to December 1913 when Wilson was fooled into singing this act. In fact President Wilson after realizing what he did stated:

"I am a most unhappy man. I have unwittingly ruined my country.
A great industrial nation is controlled by its system of credit.
Our system of credit is concentrated. The growth of the nation,
therefore, and all our activities are in the hands of a few men.
We have come to be one of the worst ruled, one of the most completely
controlled and dominated governments in the civilized world.
No longer a government by free opinion, no longer a government by
conviction and the vote of the majority, but a government by
the opinion and duress of a small group of dominant men."

Unfortunately it was too late by then, he sold away our country. And in the words of one of the owners of the USA said:

"Let me issue and control a nation's money and I care not who writes the laws." - Mayer Amschel Rothschild

FWIW, Ron Paul is a presidential candiadte advocating the abolishment of The Federal Reserve (as well as the income tax and IRS, which again its illegal and there is not ONE law on ANY book saying one exists... but ignorance prevails and people think it is...assumptions assumptions.)
www.ronpaul2008.com

I think it is time to close this thread.

Received an email from ING stating that the accounts will roll over smoothly and account holders will receive updated account info in the next 60 days. Everything except for International Transfers will be working.