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.