It hasn’t got a lot of headlines, but the US has now officially suffered its
failure since 1993. NetBank had $2.5 billion in assets, and somehow contrived
to lose more than $200 million in 2006. Deposits were insured up to the FDIC
ceiling of $100,000, and ING Direct is buying $1.5 billion in deposits for $14
million, which works out at about $1,000 $135 per new customer.
Of course, there’s always going to be someone with more than $100,000 in deposits.
But in
this case it’s hard to feel a huge amount of sympathy:
Applied Cognetics, a software development and online marketing firm based
in Brooklyn, N.Y., has about $1 million in deposits in NetBank…
NetBank customers with accounts exceeding the FDIC limit will become creditors
in NetBank’s receivership, the FDIC said Friday…
Applied Cognetics bills itself as a one-stop shop for online lead generation
and Internet development.
Colthrust and his team – who formed the company after a subprime mortgage
lender where they worked was sold – have built the 10-employee company’s sales
to more than $10 million since it was founded in 2000. Ironically, given that
lenders’ catering to subprime borrowers have led to a spike in home loan defaults,
subprime lead generation software is among the services Applied Cognetics
sells.
So Colthrust started a subprime lender, sold it, and then used the proceeds
to start a company finding leads for other subprime lenders. He also put all
his money in NetBank, which promptly went belly-up in the subprime meltdown.
There’s some kind of poetic justice there, I think.
Guzek, who works for GreenPath Debt Solutions, a nonprofit sirceve based in Farmington Hills, Michigan. People across all income brackets are having financial hardship. For those on the frontlines of the growing U.S. mortgage crisis, these are the early signs that the explosion of subprime loans made to mostly poorer borrowers is reaching higher ground. The damage is hitting homes financed through jumbo loans for more than $400,000 and so-called Alt-A loans that are a notch above subprime and a step below prime.Americans already are facing foreclosure at a record pace, according to the Mortgage Bankers Association. Lenders started foreclosure actions against more than one in every 200 U.S. mortgage borrowers in the last quarter of 2006.About 2.2 million foreclosures due to bad mortgage loans may cost U.S. homeowners $164 billion, mostly from lost home equity, according to the Center for Responsible Lending, a Durham, North Carolina-based research group.In the last three months, the percentage of foreclosures for U.S. homes valued at more than $750,000 has climbed to 2.5 percent, the highest since early 2005, when RealtyTrac, a online marketplace for foreclosed properties, began tracking data. The overall rate of foreclosures also is on pace to increase by a third this year. Everyone’s looking at subprime. The rock they aren’t looking under are the adjustable rate mortgages and teaser rates and low money-down loans, said Mark Kiesel, a portfolio manager for Pacific Investment Management Co., the world’s biggest bond manager. It’s going to affect prime as well. Kiesel said he sold his Newport Beach, California, home for more than $1 million in May last year after the property appreciated more than 20 percent in two years. He believes delinquencies and defaults will rise, weighing down most of the housing market.California, with 3,384 foreclosures of higher-scale homes since December, is leading the nation, followed by Florida and New York, according to RealtyTrac. The MBA doesn’t track foreclosure data by home value.ICEBERGJosh Rosner, managing director at investment research firm Graham Fisher & Co., says the growing numbers of foreclosures outside the subprime market is just the start. To define the problem as a subprime problem is short-sighted, Rosner said. It’s really seeing the tip of the iceberg as the iceberg. Compounding the risk is the nature of homebuyers of higher-end homes, says Rosner. About 40 percent of homes bought last year were second homes or investment properties. Speculative buyers may be more at risk, he said.Standard & Poor’s said on a conference call on Thursday that foreclosure rates are likely to surpass levels last seen during the 2001 recession. That giant ATM you’ve been living in has just shut down, said David Wyss, chief economist at S&P in New York. Consumers are in debt and we’ve been living beyond our means for some time. CDOs The latest foreclosure data also may spell trouble for Wall Street, where pools of bonds may be susceptible to nonperforming loans that underpin debt vehicles known as collateralized debt obligations. CDOs group debt based on credit quality and are similar to mutual funds in packaging securities to help diversify risk. In CDOs, the strongest debt is at the top of the capital structure, helping to smooth out any drag on performance from weaker debt, such as subprime loans. Just as more expensive homes are beginning to fall through the cracks, the fear is higher-rated bonds within CDO structures may be vulnerable. The declining performance of subprime loans have resulted in CDOs losing about $20 billion in market value, according to investment bank Lehman Brothers. UBS Securities said in a report last month that rising delinquencies may cause losses within some subprime mortgage bonds rated as high as the A category. FRAUD-FUELED At the Justice Center in Hackensack, New Jersey, on Friday, the wood-paneled room is filled with about 40 people and the auction is routine. The first property on the sales sheet lists a Korean homeowner with $509,000 of outstanding debt. There are no bidders. Deutsche Bank, holder of the busted loan, buys the property with a quick $100 bid. Sheriff McGuire calls the process one of the most distasteful parts of my position. He places most of the blame on bankers who allowed questionable lending practices. This might not have happened if not for these new type of loans, McGuire said, minutes before the auction. The loans also have helped millions of Americans purchase new homes, he concedes. The banks took a chance on the future, and the homeowners took a chance so there’s enough blame to go around, McGuire said. Still, the banks and lenders have largely set them up for this downfall. Adding to the grief, mortgage scams and con artists trying to take advantage of distressed homeowners abound, boosting foreclosure rates, county workers said. It’s not the American Dream anymore, said Fran Napolitano, a county clerk in Hackensack. It’s who can I stab next. In Detroit’s suburbs, hit hard by the U.S. auto industry downturn and financial troubles at General Motors Corp. and Ford Motor Co., the story strikes home each day for GreenPath’s Guzek. It’s sad. It’s just an awful feeling, she said. You hope that you can come up with a financial plan to help people remain in their homes, but sometimes it’s not the best thing for them. These days, her calendar of eight counseling sessions a day, 40 a week, remains full. Increasingly, she offers different advice than devising financial plans to save her clients’ homes. If they can’t afford it, sometimes the best thing for them is to walk away, Guzek said.