Rebuilding Trust

A man's character is his fate. — Heraclitus, Greek philosopher (c. 540-c. 475 B.C.) “Trust is like the air we breathe. When it’s present, nobody really notices. But when it’s absent, everybody notices.” – Warren Buffet Is there any trust for the mortgage banking industry? When the government, our elected officials and their appointed agents (regulators), files lawsuits against major industry participants, it is society saying, you have done wrong, you violated our trust. Three government and or settlements of lawsuits (?) hit the news headlines recently: the $26 billion settlement with the five big mortgage servicers for robo-signing, FHFA lawsuits in the name of Fannie Mae and Freddie Mac against seventeen major banks for fraud in private label securities sold to them, Wells Fargo settling with the Department of Justice for originating subprime loans disparately to minorities. So our government and its organs have said “no” to the way the industry originates, sells and services mortgage loans. Is there any question as to public trust for the industry? Building or rebuilding trust is a financial services industry-wide imperative as identified in the Ernst & Young’s Global Retail Banking Survey of 2011 as well as many other research reports. Steven Covey writes in The Speed of Trust that trust requires competence and character. Competence has been exemplified by the industry leadership’s speed and commitment to addressing the above mentioned issues as well as its ability to size to the market, adapt to both the changing borrower credit performance and capital market consolidation as well as preparing for the changing regulatory compliance burden. The ‘character’ part of this equation is exemplified by ethical behavior. In order to rebuild trust it is important that the work done in both of these areas is effectively communicated. Home prices may stabilize the housing market, but the housing finance market is unsustainable in its current form. Who contributes what to the reconstruction of this market is a combination of both competence and character, i.e. who is trusted to do it. The previous market took a lot of things for granted, like the government was happy to directly or indirectly promote home ownership (think Fannie Mae never forgetting to mention “The American Dream”, mortgage deductions, etc.,). Certainly government is going to have a big say in what comes next. What voice will the industry have in this process? Well, it certainly is competent, but show me the character. Character is a much harder topic to communicate. It has lots of components and is pretty subjective. How is the mortgage industry in general about trusting? A recent survey of mortgage industry leaders suggests we don’t exactly excel at trust beyond our immediate sphere of influence. The mortgage leaders’ survey results showed gaps between the values leaders and their organizations hold and their confidence that these values are the standard of behavior and decision-making within the manager and employee ranks. Also, most organizations have a written code of ethics or code of conduct (91%), yet responses to management practices integrating values and ethics into practice is considerably lower. The survey results suggests that leaders communicate about ethics much more verbally than in writing (informally rather than formally), and amongst the firm’s leadership more than to the employee base. There seems to be considerable confidence in ethical leadership, yet to a lesser degree, measurement of its values and communication of expectations and results beyond the leadership team. So, if trust is the sum of competence plus character, and I don’t trust particularly easily, how do I get to being trusted? I know I have character (ethics), I want to believe my organization is ethical, but I don’t feel quite so sure about that. Like other things you manage, do you have a “system” for managing and discussing ethics? You may train your employees on ethics, but if you use the industry tools, that training is focused on the individual identifying an ethical issue and how to make ethical decisions addressing that issue. That industry provided training has no content about how to talk or write about ethics, how to manage it, how to track or report it. In other words - it has no content on deploying or maintaining an ethical framework. An ethical framework will usually include identifying your firms’ values along with its vision and mission, recording them in a code of ethics or a code of conduct. Once these values are clearly stated you must incorporate them into your firm’s documentation, like policies and procedures, job descriptions, pay increase, bonus and performance evaluation policies. Pushing yourself to identify and write these documents will create a language for your organization to communicate about ethics. The positive reinforcement of ethical behavior and effective communication through performance and pay increase processes will eventually have the effect of having an easily identifiable ethical component of your organizations culture. Implementing an ethical framework and consistently demonstrating accountability, transparency and mutual respect directly improves risk management and compliance and better positions firms for productive communication with all stakeholders, including regulators, customers and investors. This in turn leads to building trust. There is good news too. The Harvard Business Review did an issue on Trust in 2009. Among the items they discussed was the observation that people are hard-wired to trust. The first thing we learn in life is to trust, because we are totally dependent beings for the first few years. We want to trust. The recommendation was similar to President Reagan’s foreign policy - trust but verify. With the headlines full of examples of abused trust, we need to find the language and information that demonstrates the character necessary to be trusted. Allow people to verify. Leveraging already strong process management skills should be a great place to start.

How We Communicate About Business Ethics

“Watch your thoughts, for they become words. Watch your words, for they become actions. Watch your actions, for they become habits. Watch your habits, for they become character. Watch your character, for it becomes your destiny.” Author — Unknown There are many good reasons to be able to communicate effectively about ethics. One is, industry and especially mortgage banking has lost a lot of the publics’ trust and by all estimations needs to regain some of that back. If you are doing something about that but are not able to express it, the benefits of your efforts may be a long time in coming. Closer to home, as society continues to react to the financial crisis, our front line employees are repeatedly asked to deliver government sponsored programs or comply with under-defined regulations which constantly yield unintended consequences. Another reason is that business schools are beginning to say that they have historically relied too heavily on quantitative aspects of business and are identifying qualitative aspects missing from their curriculums. So our bright young graduates and tomorrow’s leaders have no experience discussing ethics. Can we competently discuss ethics within our environment? A recent study of mortgage banking leaders suggests that senior leaders discuss ethics amongst themselves pretty freely, they discuss them with their employee base a fair amount and with their board of directors the least. It also found that leaders discuss ethics more frequently than attempt to write about it. Over 90% of those who participated in the survey said their organizations had a Code of Ethics, so the first step in a foundation with words and thoughts does exist in those environments. While leaders were confident in their own ethical clarity and observable ethical actions, they were far less confident in their employees’ ethical understanding. In the absence of senior leaders talking and writing about the industry’s or firm’s ethics, are employees only left with the narrative formed by the media or politicians? Will that improve the industry’s ability to add its voice to the public debate about who and how home finance is structured in the future? Less than half the survey respondents indicated that their firms had a methodology to deal with ethical issues. However, an ethical framework needs to be in place to enhance communication and improve the influence in society the industry has in determining its future. (... maybe - to improve industry’s prospects of determining its own future through its influence in the society?) An ethical framework uses the vision/mission of a planning process (purpose), and a code of ethics to align the firm’s values. These values are put it (incorporated?) into the firm’s documentation (policy & procedures, job descriptions, performance reviews and any other documentation which supports manager and employee decision making. It requires the firm to train its employees and managers on ethics adequately and regularly. Additionally, to ensure usage, your ethics key performance indicators must be identified which are usually answers to stakeholder issues and questions. Then create reports and score cards to track the indicators and measure improvement on a topic. Finally introduce into standing committee agendas these reports and score card to reinforce that managers and employees are accountable to perform these tasks regularly and to be fully operationalized. The development of this framework along with embracing it will create a common language about ethics within your organization as well as help align your firm’s values with its people’s decision making. This foundation will support enhancing your firm’s voice in the debate on the future of the industry.

General Article on Ethics and Mortgage Banking

I was talking to a Mortgage Banking CEO at an industry conference recently. His priority was managing growth, which had recently been very impressive. He felt they were doing it well. I asked if he thought his organization was ethical. He said it was. I inquired how he knew. He replied he just knew, conceding he had no particular facts but that his primary contribution was to hire the best people, which he felt he did. He personally put the senior team in place. They are a good team, close to all the operations and each are good managers and all have integrity. I asked him if being ethical was important to him. His reply was yes. His attitude was not unique. Most leadership training begins with hiring the best people. What is curious is that in an information and data driven industry, in which all senior people know process engineering as well as any other industry, there is no data, reports or score cards at our finger tips to demonstrate a strong ethical framework is in place. On the topic of ethics, historically managers concerned themselves with putting the right people in place and then let things sort out. Explicit communication on ethics was nonexistent, but reliance was on the knowledge that a good rigorous debate about a decision and then the results and the achievement of the goals would speak for themselves. In fact, over the last decade or more, corporate social responsibility crowded out core business ethical dialogue. But now, the ethics of the core business of mortgage lending and servicing is having a hard time finding its ethical foundation. The virtues of home ownership are being challenged by millions of homeowners being underwater. And the mortgage market is dominated by government requiring much deeper compliance measures, many of which have not yet been developed. What is ethical? Where are the ethics? In a recent industry survey of senior leaders in the Mortgage Banking industry, participants responded unanimously with “strongly agree” to Character, Integrity, Communication and Decision Making being critical for sustainability and growth. Over 90% of participants said their firm had a “code of ethics”, the starting point for an ethical framework. Yet the survey indicated that leaders communicated verbally much more frequently than in writing on ethical matters. Horizontal communication within the firm takes place, but, vertical communication much less frequently. In the survey the question was asked if over the last six months they communicated with other senior managers, the board of directors or the employee base on ethics. Also, they were asked how they communicated; verbally or in written form with each group. For each group, verbal and presumably informal communication occurs much more frequently than written (formal). Additionally, while leaders responded that the senior management team spoke of ethical matters with some frequency, they indicated that they were much less confident that the broader employee base communicated or were aware of the ethical values the firm embraced. A full 81% of respondents to the survey strongly agreed that senior management was clear on the ethical values of the firm. Similarly 72% strongly agreed managers and supervisors were accountable for promoting ethical conduct. Yet, only 36% strongly agreed their firms had an ethical methodology and only 30% felt their employees knew their code of ethics. Through several questions, senior leaders indicated confidence in themselves concerning ethical values, clarity, accountability and communication, but when asked about their employees, they indicated much less confidence. Similarly, “strongly agree” answers to using ethics in performance evaluations, pay increases or bonus calculation all was much less (33%) as was whether the firm regularly demonstrates adherence to its code of ethics in its policies and procedures (43%) than the questions pertaining to senior management. The absence of an ethical framework greatly debilitates confidence that the ethical teams of people and firms they put together actually can demonstrate their values in action or measure improvement of their use and communication of those values. By ethical framework I mean: use a vision and mission statement(s) and a code of ethics to determine and align the firms values, anchor the firm values in its documentation (policy & procedures, job descriptions, performance reviews etc.), train all their employees adequately and regularly on those values and how to use them, identify key performance indicators for proper use of the values and create reports and score cards to capture this use, and finally measure the results and introduce them into standing committee agendas to be fully “operationalized”. What the CEO above said above is representative of classic textbook leadership; put the right people in place. But after hiring the best people, firms need to do more. Managing ethically is not enough in today’s environment. Communicating ethical considerations for decision making and how they were made is becoming more and more important as decisions are subject to subsequent review. By “operationalizing” ethics, firms will be in an improved position to demonstrate to all stakeholders, including regulators and the general public that in fact it is an ethical firm, and this is how they know.

Some Business Posts

I have used this blog for personal posts which mostly just enterained myself. For a bit under a year now I have been developing with a partner a business consultancy dedicated to the goal of bringing much trust into the financial services industry and particularly the mortgage industry. This we hope will stimulate better lending, smarter regulation and more private capital. Along this journey we have had the opportunity to write a strawman Canon of Ethics for the Mortgage Bankers Association along with preparing and delivering some ethics training. We also prepared some ethics training for the American Bankers Asssociation. While we were researching these efforts and studying the industry in general, I have made notes and in some cases attempted to write articles on the topics we encountered. These articles have sat on my hardrive for a while and I have no serious plan to publish them anytime soon. But I do want them available to anyone who might ever be interested, so I will post them here. I will try to label things clearly so that it is easy to distinquish what is a business post from what is just a personal interest post. If anybody still reads this blog, thank you. I hope to visit it more regularly in the coming months. Thanks Bill