Mobile Home Park Mastery: Episode 287

The Playbook On Bank Failure

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The collapse of Silicon Valley Bank – the second largest in U.S. history – may be ushering in a new era of banking collapse. In this Mobile Home Park Mastery podcast, we’re going to scientifically review the risk of mobile home park loans and explore some of the lessons I learned from the 1987 Texas Savings and Loan Crash.

Episode 287: The Playbook On Bank Failure Transcript

The Silicon Valley Bank just collapsed, the second biggest banking failure in American history. And, as we all know, when one bank collapses, there tends to be more, and we haven't seen this occur in almost 15 years. In this Mobile Home Park Mastery Podcast, I thought we'd review some of the things you need to know, the playbook and what happens at a time when there are a lot of bank failures. Let's first start off examining what the impact is on the Mobile Home Park business from bank failures. First off, most of the types of financing people who use mobile home parks are not subject to banks collapsing. The first one, the classic, the original, is seller financing. And of course, a seller is not a bank. There can't be a run on deposits or any adverse situations from bank examiners going in to the seller's house, because banks and sellers are never the same thing. A seller is not a licensed banking institution. It's not under the auspices of the FDIC or any of the group. So you can have seller financing all day long and your risk of having a banking collapse are zero.

So what about conduit lending? Well, it's the same story. Conduit lending is a strange type of loan. You can have a bank originate it, you can have any group originate it, but then they package the loans together and they sell it on Wall Street, and at the moment they're sold, you transfer from being in a banking kind of relationship into something completely different. Something that's governed by something called a servicer, but there's no bank, there's no run on deposits, there aren't no deposits, there's no cashier, there's no drive-through windows, because it's not a bank, your loan is sold to investors, but it's no longer a part of any bank. And since it's a bankless situation, once again, it's not under the risk of any kind of banking failure. And then you have Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac, although banks are what is called a government-sponsored entity, which means the government basically stands behind it, and as a result, you're not going to see Fannie Mae or Freddie Mac fail. Now, it's interesting to note that over half in dollars of every mobile home park loan in the United States currently goes into Fannie Mae and Freddie Mac, so about half of all the actual bank lending in our industry is under the nice safe hospice of Fannie Mae, Freddie Mac. So what's left then?

Well, you've got just your traditional bank loans and, yes, those are subject to the banks failing, but it's, again, a small portion of the pie. You've got Fannie Mae, Freddie Mac, you have conduit lending, which are the two types of non-recourse loans that most park owners aspire to, and then you have seller financing, and then you have bank financing. So in that way, the mobile home park industry is a little limited. Now, if you wanna know how your bank is doing, and you don't have to worry about Fannie Mae, Freddie Mac, conduit or seller carry, but if you want know how your bank is doing, here are some tips on that. There are two groups, the track banks, as far as their solidity. One is called the session off, and the other is called the CAMELS. I used to call up during the Texas savings and loan crash back in the '80s, I would call up the Dallas public library every week, and I would ask for the session off rating of my bank, back then it was a bank called Turtle Creek National Bank.

So every week I would call the head of the library, the librarian, and I would say, Can you give me the session off bank rating right now of Turtle Creek National Bank? And they would then give it to me. And I found out, I researched what the session off readings met and what the danger zone was, and I watched the bank gradually creep down towards the danger zone, and therefore I knew something bad was eminent. In the same manner, all you have to do is call up your library, you're not going to wanna pay the exorbitant fee to have access to session off or CAMELS, but the information on the banks is available through the library. So call the library and say, Hey, what is my exposure here, what is going on with my bank's rating? And they can tell you and they'll give you a lot of advance warning if you need to be worrying about how your bank is faring. I'm sure someone had gone and got the session off rating, Silicon Valley Bank recently, they might have been pretty horrified, because again, it tells you the birds I view at that moment of the financial health of that lending institution.

Also don't forget if people weren't paying attention, they got caught up in it. That only your first $250,000 per depositor is guaranteed under the FDIC, you probably saw that Mark Cuban, for example, had $10 million at risk in the failure of Silicon Valley Bank, beyond what he had insured. That happened a lot of the Texas savings and loan crash, people were caught off-guard because they just assumed their money was safe, but they knew better, they knew there was a risk every time they exceeded $250,000 in deposits that something bad could happen. And now probably what people are gonna start waking up and realizing you can't have large amounts of money in an account. If you're curious whether or not you've got too much in that bank, you need to refer to the FDIC guidelines, you can even ask someone with the bank, or if you feel they're not impartial, some other person who's not a party to that bank and find out if your deposits are in fact guaranteed or not. But traditionally, only the first $250,000 are.

Now, I can tell you, I've have a litany of stories from the 1987-'88 Texas savings and loan crash, one of the epic bank failure moments. Literally every bank, I believe in the entire state of Texas went into default. The defaults were rampant. Let me tell you what I've learned, what I observed during the Texas SNL crash. Basically, people who tried to be the good person and play by the rules got crushed, and those who didn't, who refused were the ones that came out the survivors. Basically, when banks default, they start calling loans trying to bring in cash as fast as they humanly can. And if you look at your paperwork on most bank loans, you'll see it doesn't take much for them to claim that your loan is due, it's hidden in the boiler plate of those loans almost everywhere. So they started just calling people up as the banks were starting to crash, saying, we're calling your loan, you must come pay it off, and those people who did, who lost all their liquidity were the ones who got crushed, and the ones who said, No, I can't do it, I don't have the money, I don't wanna do it. Those were the ones who survived because there wasn't a whole lot of teeth at that point of the lending institutions trying to make people give forth the money when they're completely current on their loans.

I was once flying at a Southwest Airline jet during the savings and loan crash, and in the seat pocket of my right in front of me, was a big brown manila envelope. I thought, Well, this is strange, I found this as I was trying to jam a magazine or two into that flap. I pulled this thing out and it's a complete expose on this bank, who's obviously an anarchy, reviewing every loan in the bank and whose loan they can call due, and who they can't, who they can try and squeeze the cash out of and who they can't. And if you read it, and I didn't copy it, this is before the cell phone, I couldn't have a picture of it, but basically what it said would be, it would have the name of the borrower, and then it would say, This person seems good-natured, probably no legal representation, let's try and make them pay back. And the next one would say, Well, this person is ordinary, this person refuses, this person's gonna bring in the law, so just lets that loan go. So literally the squeaky wheels were getting all the grease and those people who are trying to be compliant, trying to be good-natured were basically run roughshod through the entire panic.

Now, I know from the savings and loan crash of '87-'88, that when you start seeing a bank or two go under, you start seeing a lot of them go under. And now, just in the first few days after the collapse of the Silicon Valley Bank, we're seeing two more banks that are on the verge, and/or have already got into financial failure. And what happens now is, the regulators will swarm over all other banks looking for similar misfortune, so don't be thinking for a moment Silicon Valley Bank stands alone, I'm sure there will be more banks in the future that will fail. But the key item is, as we start seeing banking failures, it's important to remember that our Mobile Home Park industry really isn't built on a whole lot of traditional banking. That's the good spot. And if you have a traditional bank loan, you can start tracking to see where you stand by going to your public library, calling them up and getting the cap copy of the current amount of the session off rating, that'll give you a little advanced exposure.

Make sure that you do not have deposits in any lending institution that exceed the methods guaranteed by the FDIC. And if anything ever does happen with your bank as far as the bank failing or calling your loan, don't be the agreeable, friendly person, but instead get a hold of your attorney to figure out what your rights are. And remember that often in times of panic is the people who don't obey and follow the commands, who survive. This is Frank Rolfe with the Mobile Home Park Mastery podcast. Hope you enjoyed this, talk to you again soon.