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Feds pull plug on NetBank

The seizure means new owners for its Clearwater subsidiary, Market Street Mortgage.

By Times staff and wire reports
Published September 29, 2007

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.

The bank's seizure will mean new owners for Clearwater-based Market Street Mortgage, an independent subsidiary of NetBank. "We're negotiating with a potential buyer (of Market Street) right now," FDIC spokesman Rickey McCullough said Friday night. He said the FDIC hopes to sell the company as a whole, including all the fixed assets and loan production offices, rather than breaking it apart.

Founded in 1986, MarketStreet made $3.2-billion in loans last year. It has 590 employees in 16 states, McCullough said. He said the Clearwater company did not make the subprime loans that are being blamed in part for NetBank's downfall.

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. However, the bank had nearly $109-million in uninsured deposits. Those depositors will be creditors in the NetBank receivership.

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.

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

While dozens of mortgage companies have closed because of soaring defaults of home loans made to borrowers with weak, or subprime, credit, those problems previously had occurred among nonbank 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.

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.

NetBank had reached a deal to sell its deposit accounts and other assets to privately held EverBank of Jacksonville, 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 has a toll-free number for customers affected by the failure: 1-888-256-6932.

Times staff writer Helen Huntley contributed to this report.

[Last modified September 28, 2007, 22:52:45]