Alpharetta Bank Fails & Mortgage Related Issues Are to Blame | FDIC Shuts Alpharetta Based NetBank Down Today

By
Real Estate Agent with Crye-Leike REALTORS® 165062

FDICI was searching for some Atlanta local news this evening and I came across something I wasn't looking for.  It seems that as of 3PM today the Federal Deposit Insurance Corporation FDIC and the Office of Thrift Supervision shut down a local bank which is Internet based and has no physical branches.  The name of the bank is Netbank based out of Alpharetta Georgia, and it has over 2.5 Billion in assets, and over 1200 employees.  It is the largest bank closure by the FDIC in 14 years.  The last closure of a major bank by the FDIC was in 2001.  The reason cited for tha banks closure was excessive levels of mortgage defaults.  Unlike some recent failures of mortgage companies, the one thing that is different here was this was a Federally insured Bank!  Under current FDIC guidelines, depositors with deposits under 100K will be protected.  Netbank has a total of 109 Million is deposit accounts that exceed the covered 100K limit.

When you really think about it the scenarios are much deeper than the news we read and hear each day.  Persons with savings and cash presumed there was safety in the safe haven of a Federally insured bank now find out their savings are not so safe.  These were probably not risk takers,  These persons were not flipping homes, or betting on real estate doubling in 2 or 3 years.  They assumed they were playing it safe!  Those that avoided risk in stock investments, and real estate thought their money was in the right place, a bank!  However, once they placed their personal savings and investments into the bank the bank then makes money on the spread by lending to others.  A spread is the difference between what in placed on savings, and the interest paid on what is loaned.  This works fine when everyone is playing by the rules.  The higher the presumed risk, the higher the rates charged to that client.  However there are real risks with the higher interests!  Sometimes, it may be wiser not to lend what cannot be repaid!

Risk occurs when the bank does not do their job correctly.  If the money is too loosely lent without supervision or sub prime risky borrowers without finding out how well are the borrowers are qualified?  The lender really needs to know if the borrower have the ability to repay what they borrowed.  If they do not...that is where the trouble begins!  This isn't too smart to lend money out that is all risk! This is especially true if it your money they are lending out!  That does not bode too well if the loans were made to a sub-prime borrowers when perhaps the lender of the loan was too lax with their lending standards or supervision with your money. When this happens everyone suffers, lenders, depositors, borrowers, home owners, local and national economy and taxpayers... who's government agencies have to come to the rescue. In 2003 100% of NetBank's assets were real estate.  That is out and out suicide!

In an updated note because this is a breaking news story the FDIC made some futher announcements.

Posted by

James Crawford ABR, Broker Associate

 

 

 

 

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Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
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Lola Audu  It is when you really think about it.  There is a large gap between insured and uninsured if you read the additional link I just placed on the bottom of the story.  Rob Lang also brought up an interesting item I overlooked.  Many persons and including myself often do short term CD's with my own bank, never looking at who they are held with!   That is fine as long as they are not over 100K!
Sep 28, 2007 01:54 PM #4
Rainmaker
74,030
Cris Burlew
Beach & Luxury Realty, Inc. - Saint Pete Beach, FL
Broker ~ St Pete Beach FL Real Estate

Thanks for letting us know.

I was in banking in the late 80's and early 90's and with a bank in New England that was taken over by FDIC. What a joy that was to see the 11 o'clock news on a Sunday night showing the front doors having padlocked chains so that no one could enter the building!

I feel for the borrower's who had deposits over the covered $100K as well as for the employees who are now out of a job. At least in 1991, we still had a job, somewhat, and became employees under FDIC until they could sell us off! I don't believe that will be the case here.

Working in the Securities/Trust Division as a supervisor, it was definitely not a joy trying to salvage our credit rating and having to explain things to the clearing houses. So it should be interesting to see what happens come the beginning of the week.

I never thought I would see such an event again. But, as you stated, when lending practices are extremely loose with little or no supervision, this is what can happen.

I only hope this is near the end of things in the mortgage industry.

Sep 28, 2007 02:00 PM #5
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Cris Burlew Chris think about this.. in the 1980's you actually had to put down money to buy a home!  In the 1920's on a balloon note you had to have down payment of at least 50%!  What were lenders thinking lately????  The reason that the OTS was involved was the percentage of mortgages in the banks holdings were so high...over 60% of assets!  A 100% in 2003!
Sep 28, 2007 02:19 PM #6
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FDIC Statement of Closure posted in conjuntion with the www.NetBank.Com closure.
Sep 28, 2007 05:51 PM #7
Rainmaker
87,192
Paula Henry
Home to Indy Team @ HomeSmart Realty Group - Avon, IN
Realtor - Indianapolis Real Estate - 317-605-4174

Jim - I did not read this - thanks for posting! It is a bit unnerving to think we may see more of this.

The result of all these 100% loans is the homeowner has no investment and it is often easier to let the home go and the banks are suffering. Why would any bank hold most of their investment in real estate?

Sep 29, 2007 02:23 AM #8
Rainer
67,172
Keith Perry
Coldwell Banker - Hiram, GA
REALTOR - West Metro Atlanta
Wow Jim thanks for sharing. I did not catch the news yesterday. I have heard their ads all the time and never would have thought they invested all the eggs in one basket. As for myself I was leery of the fact that you couldn't walk into a branch office even though they advertised better interest rates.
Sep 29, 2007 02:57 AM #9
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Paula Henry  Good question?  Especially if they are bad loans!  At one point the Wall Street Journal did a piece on NetBank ... in 2003 100% of their assets were mortgage loans.  The OTS was involved with the shut down because the banks current ratio of mortgage loans was over 65%.  Most in sub prime. 
Sep 29, 2007 03:35 AM #10
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Keith & Robin Perry The story broke yesterday evening.  Yes all internet, no branches, mostly mortgages, and still they employed 1200 people. I wonder if the closing will  effect us with layoffs!  Since ING purchased all the accounts, they will service.
Sep 29, 2007 03:36 AM #11
Rainmaker
680,798
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Jim, they use the word "Bank" but it is really an S&L. Mortgage lending is the main business of S&Ls (they don't make consumer loans), so they were probably "guilty" of having too many recourse loans that they had "sold" during the hot market. It could have happened to almost any S&L. If they only made "portfolio" loans they probably wouldn't have gotten in trouble, but look at all the business they would have missed.

Bill Roberts

Sep 29, 2007 10:24 AM #12
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Bill Roberts   What raises more questions of why no one is commenting on this really.  They do not understand the implications of a Federally insured bank that had no over-site until someone noticed the bank was only writing risky loans insured by we the people the US Government?  The truth is that Federal regulators regulated nothing!  The risks did not end with the bad loans, that is just the beginning.  The fallout in real estate does not end with the foreclosure, the risky loans were bundled into security instruments or collateralized mortgage obligations.  Fraud begets more fraud and begets losses that do not end at the doorsteps of the foreclosed homes.  The mess ends up in stock brokerages that fail because they invested in the worthless paper, in banks that are not being repaid for the bad loans they lent, which places your money at risk, your neighborhood in peril, and the economy in the dumps!  There was a really well written article in the New York Times article 'Six Fingers of Blame in the Mortgage Mess"
Sep 29, 2007 11:03 AM #13
Rainmaker
372,374
Donna Yates
BHGRE - Metro Brokers - Blue Ridge, GA
Blue Ridge Mountains
Jim:  I had not heard this news.  Very interesting post. I guess I'm a bit old-fashioned, but I still like going into a branch and being on a first name basis with the tellers.
Sep 29, 2007 12:19 PM #14
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Hey Donna!  The scary thing is that it is a bank!  It is the 12th largest bank failure in US history, it is the largest bank failure ever in the state of Georgia, and the first major bank failure since the last savings and loan failures.  The implications are very scary.  Whether or not the Federal government blames people for not doing their job correctly...neither was the Federal Government! The Federal regulators were not doing their job.  Sort of like all the toys coming in from China with lead paint, and sort of like the border fences that were never built as mandated by US law.
Sep 29, 2007 12:39 PM #15
Rainer
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Rita Taylor
None - Sanford, NC
Sanford NC Real Estate - Homes for Sale in Sanford North Carolina

Jim,

They had all their assets in real estate?  That's crazy - they diversification of investments in high school economics class.  You have to wonder what were they thinking? 

Sep 29, 2007 01:28 PM #16
Rainer
100,192
Kaushik Sirkar
Call Realty, Inc. - Chandler, AZ
We continue to hear way too many stories like this.  We can all thank the subprime fallout for this...hopefully this con't continue on for too much longer...
Sep 29, 2007 01:38 PM #17
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Kaushik Sirkar  The more I read about sub prime the more I convinced they were all fraud.  To quote a European article I read that referenced the American Bank failure  "US bank collapse is largest in 14 years"  They are not holding any punches and they are saying more is to come!
Sep 29, 2007 01:50 PM #18
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Rita Taylor Yes, in 2003 they had a 100% of their assets in mortgages, and since hte Office of Thrift Supervision was involved in the closure the mix of mortgages as assets were over 65%.  That is suicide especially since a lot were sub prime.  I also have to think what was teh Federal goverment thinking or not doing?  Was everyone so greedy that it did not matter?  This is some way serious stuff!  An update to this story was just posted on http://www.bloomberg.com/

NetBank Files for Bankruptcy After Regulators Take Over Unit

Sep 29, 2007 01:56 PM #19
Rainer
44,440
John Popp
Charlotte, NC

They should have been shut down a long time ago.  I have had people call me to complain about the blatant bait and switch tactics they would use to obtain mortgage loans.  This is a major problem with internet companies.  Just google Netbank mortgage fraud to see how vast it actually is.

 

Sep 30, 2007 03:20 PM #20
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John Popp Mortgage Professional  I gree, but why was a Federaly insured bank not regulated?  It is like putting a baind aid on a dead person, it never works!

Band aid

 

Sep 30, 2007 03:27 PM #21
Rainer
44,440
John Popp
Charlotte, NC
Jim you are right,  The Fed dropped the ball on this one.  I am sure that there are many more out there that need to be shut down.  The Fed is too busy bashing us mortgage brokers/mortgage bankers and are ignoring the other side.
Oct 01, 2007 10:17 AM #22
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John Popp Mortgage Professional  I agree.  Look at the pass everyone is giving to Citibank today.  They announced their profits are off 60% due to the sub prime mess.  The banks again got a pass!
Oct 01, 2007 11:15 AM #23
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