NetBank Shut Down By Federal Regulators

NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an unsustainable level of mortgage defaults.

It was the largest thrift to fail since the tail end of the savings and loan crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

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 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.

The FDIC said Friday that $1.5 billion of NetBank's insured deposits will be assumed by ING Bank, part of Dutch financial giant ING Groep NV.

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.

Why does this matter? In the scheme of things NetBank is a very small player but why it failed could be the start of a domino effect that could rival the problems of the savings and loan industry of the early 1990's.

We should all be watching the financial results of our own banks to see what they are putting in reserve for bad loans. As the foreclosures continue to climb many small banks could be in the same position as NetBank and face closure. Will the American people be forced to once again bail out an industry that caused their own financial problems? The answer most likely is yes because without a bailout many of us could see our life savings lost in a financial meltdown.