5 Lessons from the Savings and Loan Crisis

Filed in Business Management by on July 24, 2017 3 Comments

coins on houseThe savings and loan crisis of the late 1980s and early 1990s turned the home building industry upside down when the failure of more than 1,000 financial institutions led to the collapse of many small builders.

Home builders have since recovered, and even endured another financial crisis in the mid-2000s, but there are still many valuable lessons for today’s builders.

Do your homework. Whether your project is big or small, it’s incredibly important to do comprehensive market research and stay up to date throughout the course of the project to make sure you’re not missing the start of a market shift — or crisis.

“Take the longer view,” said David Ledford, NAHB’s executive vice president of housing finance and regulatory affairs. “Don’t just look at the immediate future. Rather, look at what could happen over the next period of years, as opposed to the next period of days or weeks. Recognize that things can change very quickly, so you can’t just do the research once. You have to keep it up to date and continually monitor your market.”

Be politically aware. Much of the crisis’ fallout originated from changes to tax law made in the 1980s, coupled with the fact that the savings and loan industry expanded rapidly without adequate oversight or regulation.

Make sure you’re aware of what federal, state, and local laws and regulations are being passed that may affect your ability to get a loan or even build in certain areas.

Have a backup plan. When times get tough, the tried-and-true methods often have to be thrown out the window.

“Builders need to be aware that credit availability from traditional sources can’t be relied on in times of stress,” said Ledford. “You need to have a Plan B. Think about how it could work out if all of a sudden your community bank was no longer able or willing to provide credit.”

Consider what alternative funding sources are available such as local investors or even a private equity fund. Make sure the project will still be viable if you have to deviate from your original plan.

house with coinsCommunicate with your lender. When you run into unexpected obstacles during a project, don’t avoid talking to your lender. The more transparent you are, the more willing the lender may be to work it out and stick with you through any snags.

“We found in most cases, the developer was better served by communicating as much as possible with their lender,” said Ledford. “The lenders would generally really appreciate that and be much more accommodating to working something out with a builder if the builder was willing to be forthcoming.”

Educate policy makers. “Something that is always really striking to me is how little people outside of the home building arena understand about how the business works,” said Ledford.

“We spent a lot of time trying to educate the different regulators, including the Office of Thrift Supervision, which was regulating the S&Ls at the time, that residential real estate has different characteristics than commercial real estate and should be regulated and overseen in a different way,” said Ledford. “We were successful to some degree and got the regulators to distinguish between single-family and multifamily and commercial real estate.”

Though the world has changed dramatically since the 1990s, these lessons are still just as important today as they were during the savings and loan crisis. Learning from past mistakes can help home builders across the country keep their heads above water even when times get tough again.

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  1. David Koster says:

    Timely article. I was a new builder during the immediate aftermath of the S&L crises. Today some markets, not most, are beginning to take on some very bubbly characteristics. Everyone’s radar should be on high alert.

  2. Harry Crowell says:

    The Savings and Loan companies were the victim of government regulation. Government mandated they begin lending into the commercial business, which is different then residential.
    Government insisted we should not use clear cut lending rules but instead made it illegal to use old fashioned lending with a 20% down payment and began giving loans to under qualified borrowers.
    When the business world fell apart, the Real Estate residential loans were singled out and government began closing under- performing lenders quickly, causing a further drop in Real Estate values. Then the business people started buying under performing loans from the banks and the Federal government at 20-30% of the loan amounts.
    We are still suffering from this disaster for banks still are nervous about making construction loans

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