Reflections On The S&L Crisis: Lessons From The Valuation Profession
(Published: June 26, 2024)
Overview Of The Savings & Loan Crisis – A Real Estate Appraiser’s Perspective
(Available: July 17, 2024)
Deregulation’s Role
(Available: July 24, 2024)
Interest Rate Volatility
(Available: July 31, 2024)
Regional Real Estate Impacts of the S&L Crisis
(Available: August 7, 2024)
Regulatory Failures & Inaction in the S&L Crisis
(Available: August 14, 2024)
The Resolution Process: Cleaning Up the S&L Wreckage
(Available: August 21, 2024)
Legislative & Regulatory Reforms After the S&L Debacle
(Available: August 28, 2024)
Striking Parallels to the 2008 Financial Crisis
(Available: September 4, 2024)
Corporate Governance Meltdown in the S&L Debacle
(Available: September 11, 2024)
Conclusion: Safeguarding Valuation Integrity to Prevent the Next Crisis
(Available: September 18, 2024)
Reflections On The S&L Crisis:
Lessons From The Valuation Profession
As a real estate valuation veteran with over four decades of experience, including time served as a bank examiner with the FDIC and as a Chief Appraiser at multiple regional and national financial institutions, I have witnessed firsthand the devastation that can result when prudent underwriting practices and robust governance controls break down within the banking sector.
The savings and loan crisis of the 1980s served as a wake-up call about the catastrophic systemic impacts that can arise from a confluence of regulatory failures, unchecked risk-taking, and the erosion of sound credit risk management principles. While the $124 billion taxpayer bailout represented the staggering upfront costs, the ripple effects across regional economies ,as asset quality deteriorated and credit conditions tightened, left long-lasting scars.
As an examiner during those tumultuous years, I saw up close how the lack of oversight, capital standards and internal governance controls enabled a proliferation of reckless speculative bets and outright fraud that ultimately brought the thrift industry to its knees. Institutions like Lincoln Savings & Loan, by then little more than personal slush funds for their executives, piled into excessive commercial real estate exposures and investments in which they lacked the underwriting capabilities to properly evaluate.
The impacts hit hardest in areas like Texas, California and the Northeast, where overheated real estate markets and aggressive construction lending by capital-starved S&Ls had created asset bubbles ripe for implosion. 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 from that era 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.
As experts sound alarms over parallels to the corporate governance breakdowns, regulatory capture dynamics and lack of accountability that precipitated the S&L debacle, there is a growing consensus around the need for meaningful reforms. Proposals like higher capital buffers, enhanced risk oversight, compensation clawbacks and improved public disclosure all aim to address the systemic vulnerabilities exposed.
From my perspective as a real estate valuation professional, the critical through-line connecting each of these previous 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.The multi-part series to follow will examine the savings and loan crisis through that lens – exploring the regulatory failures, governance lapses, impacts on real estate sectors and ultimately, the critical lessons for policymakers and industry practitioners about upholding prudent underwriting and valuation management practices. The goal is to facilitate an understanding of how we arrived at this juncture and what substantive reforms may be required to break the cycle of crises precipitated by the same systemic vulnerabilities.
While the series will maintain an objective, journalistic tone, the underlying context is framed by my experiences witnessing the fallout from the S&L debacle firsthand and the ensuing mission to strengthen governance over the valuation discipline. The perspectives offered are those of a veteran who has seen the movie before and understands the dire consequences of allowing the valuation controls to atrophy.
As a former examiner and chief appraiser who has had to triage the wreckage, my aim is to candidly explore where we, as an industry, fell short, including what critical safeguards need reinforcing, and how independent third-party validation can help mitigate risks before they metastasize into broader systemic shocks to prevent history from repeating itself.
The journey to restoring confidence and implementing substantive reforms must begin by understanding the painful lessons from previous failures.
In the next article, we will delve into the government’s response to the S&L crisis, including the formation of the Resolution Trust Corporation (RTC) to manage the disposition of failed institutions’ assets, and the enactment of sweeping regulatory reforms aimed at preventing a similar meltdown from occurring in the future.
Citations:
[1] https://ppl-ai-file-upload.s3.amazonaws.com/web/directfiles/
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[2] https://ppl-ai-file-upload.s3.amazonaws.com/web/directfiles/
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