From my vantage point as a veteran bank examiner, chief appraiser and now independent valuation advisor, I witnessed firsthand how quickly a lack of robust governance over real estate valuations and appraisal practices can metastasize into broader systemic risks that threaten the integrity of the financial system. 

The S&L era taught us that when institutions embark on overleveraged forays into asset classes their personnel lack the expertise and controls to properly evaluate, the consequences can be catastrophic. We saw thrifts making enormously concentrated bets on speculative commercial real estate projects based on wildly optimistic projections and flawed assumptions around market fundamentals. 

Areas like Texas saw entire regional economies kneecapped as a wave of distressed commercial and residential properties flooded the market. By 1990, over 25% of commercial properties in Dallas were in delinquency or foreclosure proceedings according to data from Trepp LLC. Residential foreclosure rates in Houston skyrocketed over 400% from 1986 to 1989 based on FDIC data. 

I vividly recall the daunting challenges our regulatory teams faced in attempting to triage and resolve the mounting tidal wave of distressed assets and nonperforming loans. We were constantly parachuting into failed institutions, poring over shoddy underwriting files, and trying to implement accountability and governance controls from the ground up in an effort to stop the bleeding. 

The lessons about the critical importance of rigorous credit analysis, third-party valuations, stress testing and board-level oversight of risk exposures were seared into my professional ethos. As I transitioned into chief appraiser roles at various banks in subsequent years, instilling those principles through robust policies, procedures and internal control frameworks became my North Star. 

Even as memories of the S&L crisis faded and a new era of deregulation took hold in the 1990s, I remained vigilant about the risks of excessive speculative behavior and the need for a strong, independent valuation management function. The subprime mortgage crisis and Great Recession of 2008 merely reinforced those convictions as the impacts of deteriorating loan quality again rippled through the real estate sector. 

Now, as the nation potentially enters a new crisis cycle with recent bank failures raising red flags over risk management lapses, interest rate miscalculations and excessive commercial real estate concentrations, the lessons from previous eras have never felt more relevant. We appear to be staring down the barrel of a potential repeat of history’s most damaging regulatory failures. 

From my perspective as an independent valuation advisor, the critical through-line connecting each of these crises is the erosion of prudent underwriting standards and credit risk management practices governing areas like commercial real estate lending. When institutions expand too rapidly into new asset classes without the appropriate governance infrastructure, expertise and oversight in place, the systemic risks compound exponentially. 

The S&L crisis served as a wake-up call about the catastrophic consequences of those lapses, as thrifts piled into speculative commercial deals and developments they lacked the capabilities to properly evaluate. The same dynamics played out in the 2008 crisis as underwriting standards deteriorated across mortgage lending. 

Now, as the current situation unfolds, there are already signs of tightening lending standards for commercial real estate and certain asset classes that could impact property markets if problems spread further. Certain sectors like office properties were already facing stress from the pandemic’s impacts, and a potential credit crunch could exacerbate distress at an inopportune point in the cycle. 

From my vantage point, the through-line is clear – robust, independent real estate valuations, rigorous credit analysis and governance controls over risk exposures are paramount to upholding the safety and soundness of the financial system. When those disciplines erode, the consequences can be devastating for the economy. 

That’s why in the aftermath of the S&L crisis, I made it my mission to help financial institutions across the country implement best-in-class valuation policies, procedures and oversight frameworks aimed at ensuring underwriting remained grounded in fundamentals. It’s also why I ultimately transitioned into providing independent advisory services to banks through my firm, Four Corners Valuations. 

Our role is to serve as a third-party check on the appraisal and credit analysis process – providing an expert, unbiased set of eyes to validate valuations and risk assessments. We deploy teams of seasoned valuation professionals to review loan files, appraisals, underwriting assumptions and stress test portfolios across asset classes like commercial real estate, multifamily, hospitality, industrial and more. 

Our services are designed to integrate seamlessly with a bank’s existing credit risk management functions, serving as a supplemental layer of independent governance over areas prone to conflicts of interest or excessive risk-taking. We bring an outsider’s perspective honed from decades of examining the failures that arise when those safeguards break down. 

In the wake of recent events, the calls for enhanced governance, accountability and regulatory reforms aimed at mitigating systemic risks are growing louder. Proposals being floated include raising capital and liquidity requirements, granting regulators more oversight of risk management practices, strengthening regulatory independence from industry influence, and enhancing personal liability provisions for executives. 

Senator Elizabeth Warren has been among the most vocal in calling for a crackdown on what she has termed “lousy corporate governance” at banks and holding executives personally responsible for lapses. 

“We cannot allow reckless CEOs to keep putting the entire economy at risk through sloppy risk management and excessive bets,” Warren said. “We need personal accountability and the threat of clawing back every last bonus when governance failures occur.” 

Enhancing personal liability provisions and compensation clawbacks have become priorities for reformers aiming to strengthen executive accountability and alignment with prudent risk management principles. 

“The moral hazard created by allowing executives to walk away rich while leaving a trail of losses for taxpayers to clean up has to end,” said Dennis Kelleher of Better Markets. “We need real financial penalties and accountability to discourage excessive risk-taking.” 

Improving public disclosure around risk exposures, modeling methodologies and internal control environments has also emerged as a key area of focus. This is aimed at empowering market discipline and allowing investors to appropriately assess governance standards. 

“Robust disclosure is critical for understanding risk profiles and whether management teams are truly instilling a culture of prudent risk governance,” said Jack Reidhill, director of a prominent shareholder advisory firm. “The S&L crisis taught us that opacity allows excessive risk-taking to fester.” 

From my perspective, enhanced governance, capital standards, and regulatory oversight are critical components for mitigating systemic risks. However, they are not enough on their own to prevent a repeat of the S&L era failures around real estate valuations and underwriting practices. 

Substantive reforms around the valuation discipline itself – including improving appraiser independence, implementing robust appraisal review processes, and mandating stress testing of collateral valuations – are just as vital for upholding the integrity of the credit analysis process. 

The S&L crisis exposed how quickly weaknesses in this area can precipitate broader systemic shocks when real estate asset quality deteriorates rapidly. We cannot allow those hard-learned lessons to be forgotten again. 

That’s why at Four Corners Valuations, we have made it our mission to serve as an independent governance layer over the valuation process for banks across asset classes. Our services provide expert, third-party validation of appraisals, valuations, and underwriting assumptions through our teams of seasoned professionals. 

By integrating our capabilities into a bank’s existing credit risk management framework, we can identify areas of excessive risk concentrations, stress test collateral values, and implement accountability over the appraisal review process before exposures metastasize into bigger problems. 

Our role is to serve as an early warning system for the types of valuation lapses that have precipitated past crises. We bring an outsider’s perspective honed from witnessing the catastrophic consequences firsthand when those safeguards erode. 

As the former director of valuation at a major bank that was severely impacted by the 2008 crisis, I saw up close how quickly shoddy underwriting practices and overvalued collateral exposures can jeopardize an institution’s safety and soundness. That experience solidified my conviction that independent governance over the appraisal and valuation process is not a luxury, but a necessity for upholding systemic resilience. 

The financial sector’s history is littered with examples of what can go wrong when that governance layer breaks down – from the S&L crisis to the subprime mortgage meltdown. We cannot afford to ignore those lessons again as new potential risks emerge around areas like commercial real estate, interest rates, and untested asset classes. 

By implementing robust, third-party valuation oversight and stress testing capabilities, banks can proactively identify areas of excessive risk concentration before they metastasize into bigger solvency threats. Our role is to serve as an expert system of checks and balances over one of the most critical components of the credit analysis process. 

The reforms and enhanced governance standards aimed at addressing the systemic vulnerabilities exposed by the S&L crisis and subsequent events are critical. However, they must be accompanied by substantive steps to uphold the integrity of the valuation discipline that underpins all lending activities. 

The consequences of allowing those valuation and underwriting controls to erode are simply too catastrophic to risk repeating the same failures again. The hard-learned lessons from the S&L era about the importance of this governance layer must become permanent institutional knowledge that guides the industry’s risk management practices. 

At Four Corners Valuations, our mission is to serve as that independent check on the valuation process – leveraging our expertise honed from decades of experience triaging the wreckage from past crises. We understand the critical through-line connecting those events, and we’re committed to working with banks to implement best-in-class policies and procedures aimed at mitigating those risks before they compound into bigger systemic shocks. 

The financial sector is once again entering a period of heightened scrutiny and uncertainty. However, by learning from the painful lessons of the S&L debacle and subsequent crises, we have a chance to break the cycle by addressing the root governance issues that have plagued the industry. 

Upholding the integrity of the valuation process through independent oversight and accountability is a critical part of that equation. The consequences of failing to reinforce those safeguards are simply too catastrophic to ignore based on the historical precedents. 

My experiences have taught me that maintaining vigilance over the valuation discipline is paramount to preserving systemic resilience and economic stability. It’s a lesson I’ve had seared into my professional ethos from the ashes of past crises – and one that guides our firm’s mission of providing that independent governance layer. 

The path forward requires substantive reforms combined with a rededication to the principles of prudent underwriting, rigorous credit analysis, and robust third-party oversight of the valuation process. Complacency and the erosion of those safeguards simply cannot be allowed to precipitate another crisis. 

The financial sector’s future resilience depends on learning from the painful lessons of our past failures. At Four Corners Valuations, we’re committed to being part of the solution by upholding those lessons through our independent valuation governance and advisory services.