Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Some Ugly Truths BOFI Fans Do Not Want to Hear

BOFI Holdings Inc. (NASDAQ: BOFI), the financial institution also known as Bank of Internet, has long been a favorite with certain investors.

BOFI’s shares have long traded at a high price ($117.77 on August 26, 2015) even though its assets and financial resources are very modest. Bank of Internet reported a TTM revenue of just $229.54 million and a net income of only $82.68 million on June 30, 2015. It also had a market capitalization of just $1.808 billion and an enterprise value of just $2.153 billion on August 26, 2015.


Those numbers hardly justify the ridiculously high stock price, which seems to be propped up by BOFI’s fans. The case these fans make is a fairly simple one: “BOFI is the bank of the future because of the higher interest rates it offers and the superior customer service it provides.” This mantra gets mindlessly repeated through certain investment websites by boosters that seem to be intent on ignoring some ugly stories about Bank of Internet that seem to contradict this rosy image.

A Few Ugly Stories the BOFI Boosters Do Not Want You to Read

There are some disturbing stories out there that the BOFI fan club does not want you to pay attention to. These stories paint a very different picture of the online bank that smart investors need to be aware of.

Those that think Bank of Internet is the future need to take a look at the following tidbits of information:

  • BOFI CEO Gregory Garrabrants admitted that his bank sometimes issues mortgages to people that have defaulted on loans in a statement to New York Times reporter Peter Eavis. Garrabrants made the admission after Eavis asked about a $4.8 million mortgage Bank of Internet issued to Florida attorney John H. Ruiz. Eavis discovered that Ruiz and his wife, Mayra C. Ruiz, were sued by SunTrust, a Florida bank, because they had not made payments on a $3 million promissory note.


  • Bank of Internet has issued mortgages to suspected con artists. In 2012 it issued a $5 million mortgage to Purna Chandra Aramalla, The New York Times On March 26, 2015, Aramalla was sentenced to 36 months in federal prison and ordered to pay $7.5 million in restitution for conducting a scheme to defraud Medicare, Medicaid, and the New York State AIDS Drug Assistance Program, according to a press release from the U.S. Attorney for the Southern District of Manhattan. Aramalla also faces charges of tax evasion.


  • Nor is Aramalla the only convicted fraudster that got a mortgage from Bank of Internet. In 2012 BOFI issued a $1.26 million mortgage to Sacramento resident Deepal Wannakuwatte, The New York Times reported. Wannakuwatte was sentenced to 20 years in prison on charges arising from an alleged Ponzi scheme in November 2014, The Sacramento Business Journal reported.


  • BOFI has greatly expanded its mortgage business by working through a network of brokers. The volume of single family mortgages issued by the bank has increased by 215% since 2012, The Times Some critics have compared this effort to the subprime mortgage market of 2005.

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  • Here is how Bronte Capital’s John Hempton described Bank of Internet in an April 8, 2015, blog post: “The reality is you are getting a 2005-style jumbo mortgage lender (with other odd high risk loans) funded primarily by high cost brokered deposit.”


  • Hempton noted that BOFI’s subsidiary BOFI Federal Bank is running ads targeting brokers that issue mortgages to questionable individuals such as self-employed artists that live in New York City. It also uses the following bothersome slogan: “The art of exception-based lending. BOFI Federal Bank can do that.”


  • There is another disturbing similarity to the 2005 mortgage frenzy at Bank of Internet that Hempton does not point out: It is vulnerable to real estate bubbles. Some of the big mortgages BOFI is issuing are in areas of the country such as New York City, San Francisco, Los Angeles, San Diego, and Denver, where bubble-like conditions seem to exist. What happens to Bank of Internet if the bubbles start busting and home prices start collapsing?


  • BOFI’s reputation for superior customer service appears to be greatly exaggerated. When website Credit Karma’s fans reviewed Bank of Internet’s customer service, they gave it just one of five stars. Just look at a few of the things Credit Karma respondents wrote about BOFI:


“Worst Bank Ever!”

“Fees, Fees, Fees and More Fees”

“Recommendation: Find another Internet Banking Company, don’t stop here.”

“Terrible customer service and basics. My suggestion is to find a different online bank.”

This hardly sounds like good customer service. Instead, these posts indicate a very poorly run financial institution.

The reality at Bank of Internet appears to be very different from the picture that the boosters are painting for us. I have to wonder how long those high stock prices can last with such stories floating around the Internet and the blogosphere.