Another one bit the dust: NetBank, the pioneering online-exclusive financial institution, is officially dead. After weaving and wobbling for some time, the FDIC announced its passing this week. Should the mortgage industry be concerned? In a word: Yes.
NetBank, being a cyber-reality instead of a bricks-and-mortar entity, always stood out within the financial services world. It was one of the very few Net-based banks to actually thrive (most of its digital competitors never achieved any success), and for years it enjoyed successful operations as a full-service savings bank. It also took on the mortgage business with gusto.
In 2001, Netbank bought Market Street Mortgage for $20 million and Bancshares Mortgage Group Inc. for $164 million. By 2004, most of its profits originated from mortgage lending. NetBank was such a prominent player that it had a partnership with the United Parcel Service (UPS) that allowed NetBank account holders to make deposits or mortgage payments at one of UPS's 3,800 national chain stores.
Yet NetBank fell victim to the disease that's been ravaging the industry: mortgage-related losses. Actually, its doom became obvious before the rest of the industry was affected: In May 2006, it put its mortgage servicing business up for sale. Things never improved from there.
As the Office of Thrift Supervision put it, the cause of death was "primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls and failed business strategies."
EverBank Financial Corp. in Jacksonville, Fla., will purchase about $700 million in mortgages currently held by NetBank. ING Bank FSB in Wilmington, Del., is assuming $1.4 billion of NetBank's insured deposits and buying $724 million of NetBank's assets. And the FDIC notes NetBank's failure will soak up $110 million from the deposit insurance fund.
While there's been no shortage of closed doors within mortgage banking during the subprime crisis, the failure of a full-service bank is uncommon. In February, Pittsburgh-based Metropolitan Savings Bank closed its doors – but that was a small community entity (only $15.8 million in deposits), and it was the first bank since 2004 to be closed.
NetBank had $2.5 billion in assets at the time it was shut down – a substantial amount, to be certain. But also consider that during its peak two years ago, it held $4.8 billion in assets.
In the coming months, don't be surprised if heroic efforts are made to prop up other ailing commercial banks and thrifts that have been cut down by the mortgage market's convulsions.
But the tightening of the credit markets will probably doom these efforts – NetBank was actually poised for rescue by EverBank, but that deal fell through. Most likely, the failures will be limited to smaller community institutions, such as the aforementioned Metropolitan Savings Bank, but don't feign surprise if another well-known major player finds itself on FDIC life support.
It would be easy to dismiss NetBank's demise as an aberration. But then again, there are still people in power who think the subprime situation is just a bump in the road.
– Phil Hall, Secondary Marketing Executive