Good Luck With That....

I'm interrupting this regularly scheduled blog to insert some rant and commentary about attempts to regulate and reform the mortgage industry.  I intended to blog today about the crazy loans we did but the universe has been speaking to me again and it is telling me that people still don't get it.

I work at an institution of higher learning funded by public dollars, well, at least we used to be.  We probably  are financed by junk bonds and mortgage backed securities these days due to the budget crisis of the state, which ironically, my former industry contributed to. I only mention this because yesterday I received an email celebrating that our business college is changing its MBA program to focus on "sustainable business practices and corporate social responsibility".  This change is described as a necessary response to corporate corruption and lack of responsibility in recent years in the U.S. economy.  As part of this transformation there will be a new focus on ethics in business.  I have the same reaction to this that I would if you told me that you are going to take over the world today.  My response, "Yeah, well good luck with that.".

Now I know that the fact that I take issue with this will make some of you react like I just announced that I like to kick puppies.  It is not that I am against ethics and responsibility, I certainly don't picket businesses with signs that read, "Fuck Ethics" or "Be The Biggest Asshole You Can Be".  What I have a problem with is the idea that adding courses on ethics will result in a more "socially responsible" corporate climate.  It won't.  It is a very well crafted public relations move by business colleges and corporations to claim they want MBA's with a social conscience, but in practice, it is not going to eliminate or reduce unethical behavior.

First, you can't truly teach ethics just like you can't teach dignity, entrepreneurship, humor, or intelligence.  You can give people tools to enhance some of these innate skills but you can't teach them.  Another part of the individual's personality that can't be taught is whether they are risk preferring or risk averse.  If someone is highly risk averse and has an inherent system of ethics that dictates that lying and cheating are bad, they will behave ethically because they will self police and fear the repercussions for unethical behavior.  Someone with flexible morality and a less rigid ethical system may not self police their behavior, particularly if they are risk preferring.  In this instance, the fear of getting punished through legal channels or getting fired will not be enough incentive to keep them from behaving in an "unethical" manner.  

What compounds this problem is that there will always be an incentive for people to behave unethically and in a risky fashion as long as there are gains to be realized for engaging in this behavior.  Look at the jockey Calvin Borel who just won the Kentucky Derby.  He was willing to take the risky path of riding the rail in an attempt to gain a competitive advantage over the field.  This isn't unethical but it is risky.  He succeeded in winning the race not just because he is an incredible jockey with a fast horse, but because he was willing to do what his competitors wouldn't.  He was willing to risk disaster for the gains to be realized if the risk paid off.

If you are willing to do what your competitors aren't there will probably be gains to be realized by doing so.  In my time in the mortgage industry nobody embodied this ability to gain at the margin like the Mortgage Devil.  He revolutionized our market and created a virtual monopoly.  He did this by doing what the rest of us weren't willing to do.  These activities included answering customer's phone calls 24 hours a day, never taking a vacation, drinking grass water to avoid having to eat food and take a break, and volumes of unethical and fraudulent behavior.  What did he get in return for this behavior?  Yearly earnings between one and two million dollars and for many years there was no credible threat of punishment for this behavior. 

A. Hole and I used to talk about his flexible morality.  We never understood how he could get on his high horse and crucify someone for committing fraud while he was doing the same thing.  Ironically, he had an MBA and took business ethics courses.  They didn't work as intended.  The bottom line is that there was no policing of loan officer's behavior so there was no incentive for him to behave in an ethical manner.  Teaching MBA's ethical responsibility won't achieve more corporate social responsibility.  The only way to encourage ethical behavior is to reward that behavior and punish those who behave unethically.  Currently, those institutions are not in place in most industries, but particularly in the mortgage industry. 

During the peak of the housing boom the entire mortgage industry operated under the 80/20 rule.  Automated underwriting was touted as working for 80% of loans and the industry seemed to accept that if 80% of loan officers were behaving than it would more than make up for the 20% committing fraud.  Turns out, the 80/20 rule doesn't always hold or perhaps, it should have been called the 20/80 rule.

This leads me to my next problem with the new regulations of the mortgage industry, the new Nationwide Mortgage Licensing System.  For now, it requires mortgage originators not working for an FDIC insured financial institution to become licensed through their state.  It requires that mortgage originators subject to background checks, credit reports, continuing education and a series of questions that are meant to kick out applicants who have previously been caught in fraudulent behavior.

Again, this sounds sensible.  But, for now mortgage bankers only have to register with the service they don't have to be licensed, oh and there is the small problem that APPARENTLY LOAN OFFICERS CAN FRAUD THE SYSTEM AND GET LICENSED.  This is more crap to make you feel like you are being protected by the government with regulations that ARE NOT BEING ENFORCED!!!  A regulation that is not enforced is about as useful as a Snuggie.

You should be pissed that these regulations meant to protect you from the deviants is easily circumvented.  You should be outraged that the government is passing regulations meant to help consumers even though they know they aren't going to be enforced and don't even begin to address the real problems.  It's all show and no dough.

I know a loan officer who has foreclosures and judgments on their credit report, was asked to resign from another company for fraud or what they describe as a "grey area", and is involved in a lawsuit that relates to a complicated fraud scheme that included a phony loan application and the forging of a signature on settlement papers.  There is not a single element of the licensing requirements that this loan officer doesn't violate and they were awarded a license last week.  While were at it, why don't we bring back those guys from Enron and give them licenses too.

Regulation without credible punishments, monitoring, or enforcement mechanisms will never work.  In fact, I think the more asinine regulations we pass the more fraud we create.  It provides an incentive to do what your competitors won't....which is exactly what we are trying to prevent.

Regulating the mortgage industry...hmmm.  Good luck with that.