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.