SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteWhy this Crisis is So Different from the 2008 Wall Street Collapse and How We Can Lead During an Event that Impacts the Entire World

April 13, 2020
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

The current COVID-19 health crisis presents the mortgage industry with a unique dilemma when it comes to risk management and crisis leadership.  For those of us who lived through the 2008 financial meltdown, this feels very different.  In fact it is a lot different.

In 2008 banks and mortgage lenders faced somewhat unprecedented losses when a combination of a bear market on Wall Street, a sour economy, rising interest rates, and increased unemployment caused massive foreclosures.  Lenders were overwhelmed with loss mitigation efforts.  It felt like the industry had burst a success bubble that had been growing and growing for 5-7 years on the backs of a mini economic boom and great rates.  Relaxed lending standards and high risk loan products further fueled the growth until it all collapsed.  The result, which triggered the Wall Street Reform/Dodd-Frank Act, was very different than today.

The problems of the 2008 collapse were somewhat centralized.  While the consequences did effect other nations and other industries it was not universal. Banks needed propping up and some sectors of the population faced financial stress however not everyone felt the pain.

COVID-19 is a threat to the entire world.  As of today 184 nations have reported the health threat in their populations.  The threat is the same to everyone, every industry has been impacted, every community has faced the threat, and the risks have been medical, financial, supply chain, economic, and psychological.  The risk has been a moving target, so that the normal approach to risk management (identify the risk, assess the consequences to your business, and manage a response to mitigate losses) has been difficult if not impossible.

Whereas in 2008 the issues on Main Street boiled down to “will I save my house?”, and for lenders,  “will I regain my profits?,” today they are more dramatic.  Today the worries for many people are “will I survive?, “when can I leave my house and get back to a normal life?”, and “do I have enough food to feed my family?”

Still, a crisis demands crisis leadership.  It requires us to apply a systematic approach, to adapt and overcome through innovation and creativity, and to embrace forward thinking.  The current situation has inspired a multiplicity of effective responses:

  • Businesses had to establish key priorities to allow them to continue to conduct business as an essential industry.  Many lenders addressed this by (a) creating remote work environments, keeping folks employed, keeping business going and adapting to new workflow and operational processes based on all available technology platforms.
  • Companies have been forced to embrace innovation and create new ways of doing things.  Digital mortgages have been around for years but never received the love they are getting right now.  The rush to embrace eMortgages and eClosings has been overwhelming to many of the providers of these services.  Overnight they have become important and they are responding.  Likewise remote notarization, a concept that gained little traction nationwide before COVID-19 is now taking off, with several states simply issuing executive orders allowing something they never permitted before this crisis.  The rush to train and prepare closing agents for a digital mortgage world is ongoing and important.
  • Government intervention was needed which included the executive orders previously mentioned, Federal Reserve intervention, small business assistance, and tax and income assistance are all positive responses to the economic gut punch this “silent enemy” has driven into the American economy.
  • Business leaders have had to adjust to a “new normal.” High stress, high stakes executive leadership  where the focus is to overcome as well as one possibly can making the best decisions in a changing environment without precedent and without a clear picture of an end game. Will this last a few more weeks?  Will it take a few more months?  Could it last a year?  The healthcare and economy experts all differ in their responses, which does not give business owners much comfort.

Some of you may be familiar with the “Stockdale Paradox,” named after Vietnam prisoner of war and Medal of Honor recipient Admiral James Stockdale (also Ross Perot’s VP running mate for trivia buffs).  During his imprisonment Admiral Stockdale won praise from fellow prisoners for establishing and maintaining a crisis communications process to maintain morale and discipline under very trying circumstances.

The Stockdale Paradox looks at crisis communications as a fine balance between honesty and hopefulness.  It employs a combination of clear and open honesty of circumstances, expressing realities and avoiding false hope, while on the other hand projecting a basis for rational hope and positive thinking (“we will all get through this”).

Business leaders in the mortgage industry can easily adopt the Stockdale Paradox approach by establishing regular communication channels.  Many lenders open each work day with a teleconference with key managers to review the previous day’s work, to discuss issues and problems and to solicit and discuss ideas to move their companies forward.  These events help to keep employees calm, focused, informed, organized and supportive.  The key managers are encouraged to take the overall message back to their departmental employees thereby maintaining a line of communication from the very top throughout the entire company.

Beyond good communication what else can leaders in crisis do to help their businesses and their employees?  Continue to lead.  Make decisions through keen and careful observation of the current circumstances.  Be innovative.  Be flexible.  Remain confident while also being on guard for unexpected consequences and unplanned events.  No one knows what the near and far term holds for us all, yet we must keep moving forward.

Lastly, do not neglect your employees as they are fearful and rightly so.  Encourage them with emails.  Plan morale building activities (send in photos outside your window, guess the baby picture are just two I have heard about among your peers) and send them a care package to let them know that even if they are remote and out of sight they are not out of your mind as a leader.  We sent each employee a bag of chocolate covered pretzels last week.   This was a small gesture to be sure, but one which was appreciated by every employee because the gift, with a short note of thanks and encouragement, was a pleasant interruption from the daily routine at home.

Lastly, remember your core business values.  These concepts that have guided your organization for years do not stop when employees work from home, nor should they be abandoned in this time of crisis.  I might argue that the opposite is true: core values are most important when times are stressful, difficult, and uncertain.  These values are a foundation for resilience and continued success.

Be well.  Be strong.  Please remember we are all in this together!








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