It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory
An article just published by the New York Times trumpets the news that house flipping is popular again. Those of us who have been in the mortgage industry for the past 10-15 years know that low interest rates and loose credit standards combined with property flipping fever drove much of the housing bubble in 2003-2008. That bubble eventually burst when many “flippers” encouraged by late night infomercials promising fast and easy profits in real estate, learned that the housing game can be more difficult than what can be explained in a 15 page pamphlet written by an “expert” and costing $300.00.
The focus on flipping for too many non-experts is profit maximization at all costs. Profit driven flipping can mean short cuts, substandard renovation work and beyond that appraisal, seller and closing agent fraud involving straw buyers, inflated values, and hidden defects. It can also create scenarios where unscrupulous investors prey upon inexperienced buyers and construct impossible or fraudulent sales scenarios where everyone but the seller walk away with a serious risk of loss.
In the mortgage industry it is common to state “everything old is new again,” and when we read articles like this one today we cannot help but remember the confluence of easy credit, low interest rates, lots of available inventory and many real estate “newbies” seeking to get rich quick flipping homes for profit. Lender beware.