Addressing Mistrust

“Mistrust doubles the cost of doing business” John Whitney, Columbia Business School The cost to originate a residential mortgage has ballooned from 93 bp’s in 2003 to 231 bp’s in the third quarter of 2012. Almost all of that are new procedures and reporting of additional data required by investors and regulators. There are several ways to reduce this cost in the near future. Recently, the final issuance of guidelines will allow technology and policy and procedures, guidelines to standardize the new requirements, thus bringing down the cost somewhat. But there is still a large premium in that number for the mistrust lingers with the mortgage industry today. The rigor with which a successful total quality management or continuous improvement process style of management takes, requires using a lot of facts in a continuous and organized fashion. The tool kit includes reports, scorecards and dashboards to generate the information we need to digest in order to determine the quality and efficiency of our groups’ processes. We answer the question- are we meeting our goals or stretch goals for our process and production? The information positions us to make the many small decisions that can often have a big impact on our production or quality goals. The mortgage industry has well known quality and process metrics; speed to approval or closing, error rates and related reworking, effectiveness of turning inquiries into applications, applications into approvals and approvals into closed loans. Less pursued and often more impactful in managing these key performance indicators is the information we rarely turn to regularly because we don’t turn it into data. If we did, this information can also be used to make small decisions that can have a big impact on results. They are things like- is management’s vision for the business and future known and understood by those doing the work (alignment of the workforce), is our organization’s culture supportive of what we are asking of employees and want to deliver to customers and other stakeholders, are employees engaged and do they have what they need to make decisions in the course of normal and not so normal circumstances? The first reaction to these questions by leaders is usually -that’s why we invest in training and technology and aggressively document our expectations in policy, procedures and guidelines. All of that is good, and in the rigor of continuous improvement, one can never be let up. But the key quality and process indicators are results and don’t directly measure the questions in the previous paragraph. Those measurements have to be derived by asking the questions to the parties involved, collecting the results and measuring performance against a goal. The goal setting and asking part are very often not ever bothered with when a company is focusing on big issues around growth and process improvement. That is as big a mistake as not asking customers if they are satisfied. Best practices needs to include performing regular assessments similar to the questions posed above, as well as other questions measuring a variety of issues around the attitudes pervasive in your organization, capturing the results and tracking their movement over time in a report, scorecard or dashboard, similar to other key indicator measurement tools. These tools have the ability to reflect when an organization’s culture supports decisions in the absence of technical or policy, that are knowledgeable and consistent with all stakeholder interests. It may seem like a “nice to have” and not a “have to have”, except a careful reading of the Consumer Financial Protection Bureau Examination Manual reveals that they are going to look at a firm’s culture specific to the law. What metrics will you show them to affirm your supportive culture? Managing and leading in the world going forward requires a larger tool kit. Assessments that solicit feedback on attitudes and values will be as important to decision making as the quality and process key performance indicators used today. And as you chip away at mistrust, you will move costs down, enhancing profitability and sustainability.

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

The Good Soldier

I finished reading the Good Soldier Svjiek recently and enjoyed much of what the story had to offer. While Eastern Europeans are all familiar with the story, I dare say most Westerners are not. It is a story of an unfortunate and unwilling Czech soldier drafted into the First World War For most of the story he follows orders to the best of his ability and to the letter of the instruction, only to have very amusing and unintended consequences. With the exception of anything from Kafka, it is the literature Czech’s are most proud of and the story is celebrated in Prague and bars and pubs throughout the Czech Republic. It was an important influence for Joseph Heller’s Catch 22, for you Westerners who need a reference point.
Similar to the Mystery of Edwin Drood, the author died prior to finishing his vision of where the story or characters will go, so the reader is empowered to visualize his or her own ending. This attribute has contributed to the mystique of the story and fueled the popularity. Debating who Svjiek really was and what he stood for is the dominant pastime in Czech bars, replacing sports and politics. It is a lot of fun to read and experience the folklore yourself, Czech beer being the perfect enabler.
For those of us who have by design or not, wound up traveling the world doing our best to perform the tasks in front of us in new and strange environments, Svjieks’ adventure of unintended consequences is a pleasure. Just recognizing the successes or failures from what we do is so detached from the plan or intention, Svjiek is a brother traveler with a familiar tale and an end of our own making. What fun. If you have not read it, read it, especially if you are taking off for your first job overseas or just wondering how you got to where you are!

Turning 50

On Saturday I turned 50. It has been an incredible sprint to get here, even though I was in no hurry. Since my last posting in July, my family and myself have been through a lot of change and at a very fast pace. Let me recap it for you: when last I posted I was in the Latvian countryside enjoying a very slow and enjoyable 6 weeks. Then my wife, my dog (Capitan Spaulding) and I were driven two days with by my stepson and his girlfriend to Prague. We got Spaulding’s papers in order (from a ministry who was closed but accommodated us anyway) and flew to New York. During the flight we watched Marley and Me, which made my wife and I completely gilt ridden. IN New York we spent 5 days getting Spaulding over the flight by staying at my brother’s house. He has two German Sheppard puppies and the three dogs played and got along well. Spaulding’s healing from a drugged up flight was complete. We then packed again into a car and drove two more days to Florida, our new home. My son joined us the next day and started school the following Monday. My wife began getting her American green card paper work into place as I got our insurances and other necessary items in place. We had one and a half weeks, and then I left for Riyadh, Saudi Arabia where a start-up had asked me to help out.
My wife has since gotten her green card and social security card. She has also learned to shop effectively online and is refurnishing a house that used to be a beach house into a Moroccan style villa. My mother moved back from New York to her home down the street from us. She is a valuable shopping companion to my wife, using her twenty five years of aggressive shopping in this part of Florida to teach my wife non- online shopping art forms.
My son and I visited colleges the second trip home which is when we celebrated my 50th birthday. I keep threatening him with me going back to college too. The option is very attractive to me most days. Riyadh is a very tough place to spend a significant amount of time if you are holed up in a hotel. The local social and cultural norms are pretty unsatisfying to a westerner. Perhaps Saudi Arabia will be a future blog entry, but let’s just say American college is looking very attractive.
After these past few months I can hardly believe the level of change in my life. To add more disbelief to the mix, I am half a century old. How the hell did that happen? I am pretty sure I would be in shock if I was not so busy.