No, It's Not 2008: How to Talk to Your Clients About Silicon Valley Bank
The meltdown of Silicon Valley Bank sent shockwaves through the proptech industry. Here’s how to keep it from poisoning the well during the spring market
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For those of us who were part of the real estate industry in 2008 — or who are just old enough to remember 2008 — the meltdown last week of Silicon Valley Bank felt like the worst kind of deja vu. The fears were compounded by the fact that so many proptech entities, including Opendoor, Tomo, Roofstock, and more, did at least some of their banking there. This was followed by the sudden closure of New York’s Signature Bank on Sunday.
To make matters worse, all of this is happening on the cusp of a spring market in which many agents need to do well so that they can cover their nut for 2023. It’s also happening at a time when consumers are easily spooked by any negative economic news.
But first, a brief history lesson
The 2008 financial crisis had multiple causes, including an overheated real estate market, and poorly collateralized mortgage loans provided to poorly qualified borrowers. Homeowners were overleveraged in their houses with little equity, which really forced them into the short sale and foreclosure market. Now, the real estate market, credit scores, and the average amount of equity are all completely different than what they were in ’08.
When banks built their financial houses on financial instruments tied to securities backed by those problem mortgages, the resulting collapse was almost inevitable.
The “too-big-to-fail” banks were among the most venerable, interconnected, and complex financial institutions in the world, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. For the sake of comparison, SVB had about $211 billion in assets at the end of 2022. Bank of America had more than $3 trillion at that time. Thus the scope and reach of SVB as a financial institution don’t begin to compare.
The first response to SVB’s closure was from other financial institutions, offering reassurance that their fundamentals were strong. One of the big pushes following the 2008 meltdown was the implementation of Dodd-Frank, part of which required increased liquidity to ensure that banks consistently had enough assets on hand to protect against a similar financial domino effect in the future.
For the technology community, of course, the financial danger appeared imminent, since many companies that banked with SVB would be unable to make their payroll and other payments in the near future. The FDIC only insures up to $250,000 of deposits, so anything over and above that amount would, under normal circumstances, be left uninsured. In that case, payments toward uninsured deposits would be made from the sell-off of SVB assets, which promises to be a long, drawn-out process.
As of Sunday night, however, regulators approved a plan to make depositor funds available as of Monday both for SVB and Signature Bank, a crypto-friendly, New York-based bank that was closed on Sunday due to “systemic risk.” In addition, the Federal Reserve announced a new Bank Term Funding Program to offset the risk to banks affected by the failure of either of the two institutions.
As folks in the tech industry and those with money in SVB and Signature breathed a sigh of relief, the average hopeful homebuyer or home seller looking to gauge the impact on the spring market did as well.
5 points to remember
Now, it’s up to real estate agents and brokers to create content and reach out to spheres of influence to ensure they aren’t driven by irrational fears and incorrect assumptions. Here’s what to emphasize:
1. This time isn’t like 2008
Virtually across the board, experts are confident that the end of SVB and Signature don’t spell a major meltdown of the banking industry as a whole. The circumstances are different, the customer bases are different, and the banking industry is far stronger than during the mortgage crisis. In addition, early government intervention has been designed to limit the impact on the financial and tech industries.
2. Recent financial stress tests offer good news
The Federal Reserve conducts regular stress tests to determine how likely a major meltdown like 2008 could be. The good news is that the most recent stress tests showed that the major banks could survive both a deep recession and significant unemployment, neither of which appear to be on the horizon now.
3. SVB and Signature were highly specialized banks
Silicon Valley Bank primarily served a narrow niche of the banking sector, including big-money startups and founders, venture capital firms, and private equity firms. Signature played a similar role for cryptocurrency companies. While there will be losses to individuals and companies, those losses should be insulated from impacting the broader economy by their narrowly focused client list. Other banks are, in general, far more diversified, offering them more protection.
4. Some existing mortgages may change hands
According to its most recent annual report, many of SVB’s assets were secured by real estate holdings, both residential and commercial. That may mean that some existing mortgages will change hands. Homeowners should be on the lookout for notifications from their servicer if there are any changes to their mortgage.
5. Unless they worked for one of the institutions involved, the end of SVB and Signature shouldn’t cause people to change their plans
Unless they have reason to believe that they will in some way be personally affected by the closure of either of these financial institutions, most buyers and sellers shouldn’t worry much about these bank closings. Although it might stir up uncomfortable memories, this time is not like last time — and there’s no reason to think it’s going to be.
In an article I wrote in 2018, I said, “Realtors aren’t just here to help buy and sell houses, but also to protect the American dream.” I want to emphasize that our role extends beyond just real estate transactions. We can help our clients navigate the financial landscape and connect them with trusted professionals who can assist them in making sound financial decisions.
As we all know, access to financial resources is a critical component of achieving the American dream. As Realtors, we have a unique opportunity to provide reassurance to our community, sphere of influence, and industry that we are here to help protect their financial interests during these uncertain times.
Let’s approach today with a renewed sense of purpose and dedication to our client’s financial well-being. As we continue to serve our communities, let’s remember that our words and actions can have a significant impact on people’s lives. Together, we can help protect the American dream for generations to come.
BY TROY PALMQUIST
March 13, 2023
Randy Byrd, Team Leader & Coach
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