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May 2023 » thefivestar.com 31 May 2023 C O V E R F E A T U R E great deal during the foreclosure crisis about performing good outreach and getting bor- rowers who can be helped back to the table to work things out. The best servicers know they have to put people on the street, knock on doors, and get face-to-face with borrowers if they want to help them. Finally, the government's actions have shown that the administration will take quick action to solve problems like this, and I sus- pect that they would take similarly strong ac- tion in the case of another foreclosure crisis. Vella: Regulators and financial institutions will continue to be aware of the quality and type of assets being originated to ensure credit quality remains strong while mandating tighter capital requirements and ratios. Startup companies could be under more pressure to secure financing as financial institutions balance deposits and loan exposure. Q: Could we see the downfall of similar institutions in the months to come? Channel: It's entirely possible that more institutions could struggle or outright fail over the coming months/year as the economy weakens. However, I don't think that we're on the precipice of another crash of 2007/2008. All in all, I think that the broader bank- ing sector is strong enough to weather an upcoming recession and, even if some do fail, the government appears more than willing to quickly step in and protect depositors. Middleman: It very well could be the beginning of a greater downfall. Right now, confidence in banking is undermined. It will all depend on the actions of the Fed and what steps they take next. The hope would be that things normalize and settle back down. Now, if they insure all the deposits, then there won't be a problem. However, confi- dence in the banking system has eroded and there are fears that there might be credit tightening, along with the potential for infla- tion or a recession, which is typically the case. In one scenario, we stay at full employ- ment with higher costs of goods and services. The other scenario is we don't have as much inflation, but unemployment rises. Either of these events will be bad for our economy and a challenge for our society. Muoio: So far, the regulatory response seems to have contained the initial fallout, as did the swift bailouts and acquisitions of failing banks by larger institutions. However, investor and depositor perceptions can change rapidly and are very difficult to defend against. The more time goes by from those failures without further incident, the less likely it will be for matters to snowball. Additionally, the Fed is now acutely aware of the situation with sentiment and bank balance sheets and will tread carefully so as not to exacerbate the situation. Preuss: I don't believe so, at least not for the mortgage industry. It will likely have repercussions that impact the venture capital industry and banks that lend primarily to tech startups, but it is not a reflection of the safety and soundness of the home finance industry. Vella: I highly doubt that we will see a large downfall of additional institutions unless credit quality deterioration rapidly emerges and there is a real estate market collapse. Smaller and mid-sized institutions will face more challenges with capital requirements and outlay during a rising interest rate environment and inflation. Q: Is increased supervision by the Federal Reserve the answer to prevent future collapses? Channel: Absolutely. Though regulation is often seen as a dirty word by some within the banking sector, history is pretty clear about how bad things can get when regulation becomes too lax. The Fed needs to be much more involved in making sure that banks are behaving responsibly and acting with the best interests of their depositors in mind; otherwise, these recent and relatively isolated collapses could balloon into a much bigger problem. Nobody wants a repeat of the Great Recession, and to avoid that, we need stronger regulation. Middleman: Increased supervision is not the solution, in my opinion. I think sensitivity to what is being supervised is the issue. There should be a playbook on what needs to be supervised in various economic conditions. In other words, supervision should be dynamic, not static. Rules should and do exist, though. Behaviors change around different conditions—what is an I highly doubt that we will see a large downfall of additional institutions unless credit quality deterioration rapidly emerges and there is a real estate market collapse. Smaller and mid-sized institutions will face more challenges with capital requirements and outlay during a rising interest rate environment and inflation." —John Vella, CRO, Selene Finance LP