Reply To Peppers And Rogers On The Subprime Mortgage Mess

In their weekly 1:1 Media email, Don Peppers and Martha Rogers addressed the subprime mortgage situation with a piece titled “Subprime Woes Shows Consequences Of Short-Termism.” In it, they wrote:

The situation serves as a lesson for companies fixated on the short-term bottom line. It dramatically illustrates that neglecting a customer’s long-term situation can devastate customers. Some of these subprime lenders may have thought they were being customer-centric by making low-interest home loans available to consumers who wouldn’t otherwise be able to get them — people who had little credit or a marginal financial history. But the companies didn’t advise these customers on the potential dangers or long-term implications if interest rates rose substantially or financing changed. A lesson here for all companies is simply this: If any of the ways you make money will not be good for customers, figure out a better way to make money that brings what’s best for the company and what’s best for the customer into alignment.”

My take: While it’s nice to see that they agree with what I said at the end of my post on customer-centricity 🙂 — they didn’t touch on two very important factors in this situation:

1) Compensation structures.
It wasn’t so much a focus on short-term versus long-term results that drove those lending decisions as it was the reward and incentive structures of those firms. What would Don and Martha expect those salespeople to do — turn away customers? They would have if they had been compensated to do so. I couldn’t agree more with Don and Martha about firms figuring out how to align their business models with what’s right for their customers. But a core part of that alignment is aligning rewards and incentives of employees — and simply taking a longer-term (vs. short-term) focus would likely have changed nothing about that.

2) Personal accountability. Was it really the responsibility of salespeople (or the lender) to advise customers about the dangers of rising rates? When you buy a house, is it the responsibility of the realtor, seller, or mortgage provider to warn you that housing prices might go down? Is it the responsibility of a car salesman to tell you that Consumer Reports gave the car he’s selling you a lousy rating? No. With all the hoopla about the influence of word-of-mouth, where were these customers’ friends and family when they were making bad borrowing decisions? And why didn’t they do some research about the decision they were making? In all likelihood, they did — do research and get advice from friends and family, that is. But they went ahead and took the risk.

So let’s get this straight: Consumers went looking for loans, lenders paid people to sell these loans, and customers decided on their own free will to take the loans. And now someone wants to come along and blame “short-termism” for the situation? Sorry, I’m not buying it.

We live in a society (here in the US, at least) that places great emphasis on owning your own home. Many people who suffered “subprime woes” were simply trying to get their piece of the American dream. At the time, the lenders were heroes for helping them make it happen — but now they’re the villains, when the situation turns for the worse.

The root of the problem isn’t “short-termism” — the situation is far too complex for such a simple explanation.

More central to the problem is the general lack of affordable, appropriate, and objective financial advice — and the unwillingness of consumers to pay for that advice, even if it was available.

On one hand, the financial services industry has not found a way to provide objective advice to the masses.

But, on the other hand, many consumers don’t take sufficient responsibility for managing their financial lives. They just don’t put a lot of time and effort into managing their money. I don’t mean to sound critical. It’s their choice, and I respect that. But to absolve themselves of blame — or for a management consultant to absolve them of blame — is simply wrong.

The good news — for future borrowers — is that that the future is likely to be different (and better) for three reasons:

  1. Experience. Investors who suffered through the dot-com meltdown are far wiser today, and — just as importantly — tell their stories to newer investors who learn from them. So it will likely be with the next wave of home-buyers, who will learn the dangers of rising rates from today’s borrowers.
  2. Involvement. Today’s Gen Yers and even the next generation after them — the borrowers of the future — are a lot more involved in the management of their financial lives than today’s Boomers and Seniors were at that age. It’s surprising how many Gen Yers are already thinking about and saving for retirement.
  3. Technology. Sites like Wesabe offer the promise of sharing objective information with the network — and getting that information out faster than it was disseminated in the past. And it be long before larger, more established FIs follow suit.

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p.s. I do believe that there is great financial advice to be had. But much of it either: 1) centers on the deployment of assets, not the disbursement of funds; 2) requires a lot of assets on the part of the customer to be able to access that advice; or 3) isn’t objective.)

10 thoughts on “Reply To Peppers And Rogers On The Subprime Mortgage Mess

  1. The other interesting thing about the subprime mortgage fiasco, as it relates to database marketing, is that almost 100% of these loans are sold immediately. In other words, the company that acquired the customer sold that customer and really had no opportunity of building a long-term relationship with that customer. Plus, most of those subprime mortgage lenders don’t even offer any other products than REFIs. “Short-termism” is really all that we should realistically expect with this business model.

  2. RON: You said, “So let’s get this straight: Consumers went looking for loans, lenders paid people to sell these loans, and customers decided on their own free will to take the loans. And now someone wants to come along and blame “short-termism” for the situation? Sorry, I’m not buying it.”

    Lenders paid people to sell these loans. That is the greatest crime committed here in my opinion. The mortgage companies failed to BALANCE the cash awards for production with some kind of corporate conscience. Empowering employees to make decisions but showing them where the line is – if it potentially harms people in the long run – really not in THEIR best interests, we need to counsel them. Bring back guilt and shame!

    I applaud credit unions for not jumping on this band wagon of debt promoting and sticking to their guns. Credit Union’s were founded to promote thrift. Saving for closing costs and a down payment (of SOME kind) is promoting thrift. Living within your means. All that silly stuff.

    I don’t expect banks to change their values anytime soon – but as a taxpaying American I’m not thrilled at the prospect of bailing out this ultra-greedy, short sighted, shame-on-you-all behavior.

    If Peppers and Rogers want to spank the bank – I say go for it!! Let’s hear that again…..

    “A lesson here for all companies is simply this: If any of the ways you make money will not be good for customers, figure out a better way to make money that brings what’s best for the company and what’s best for the customer into alignment.”

    We have been preaching that to drug dealers, prostitutes and now cigarette companies – why not sub-prime mortgage lenders?

  3. I don’t know that I agree w/ you here, Denise. I think, like Suzanne points out, that more often than not it was a specialty mortgage lender who is the culprit here, and not the large banks.

    I don’t think Peppers and Rogers were spanking the “banks” — they were criticizing firms that didn’t take a long term view of their customer relationships.

    But as Suzanne said, for many of the subprime lenders, this is a moot point — there is no long term relationship.

    Interestingly (perhaps), drug dealers, prostitutes, and cigarette companies seem to do a much better job of building long-term customer relationships than financial institutions do. Um, er, well, from what I HEAR anyway. Well, I mean, not that I hear directly…

  4. As a reformed front line sales robot selling said subprime loans, I did all I could to educate customers about ARMs – ultimately, the customers were doing the short term thinking – better rate and lower monthly payment outweighed the risk of rising rates when the ARM would reset.

    Fixed loans were always an option, but one that few subprime customers cared to consider. That’s one reason I’m no longer a mortgage originator.

    It paid the bills to get me through college and put food on the table.

  5. I think you guys are onto something. There are two major things I am learning from this. First consumers inevitably make up their own minds about whether to take the mortgage or not. It’s nobody’s fault. Salesmen sell mortgages, that’s what they’re paid to do.

    On the other hand, you have the issue of customer loyalty and a missed opportunity for the financial institution to build a long-term relationship. However, this is a bank, not a retailer, we’re talking about. They need to mitigate risk ASAP and their number one goal, especially with sub-prime lending, is to syndicate that portfolio of loans/mortages to other banks who want to share the risk. If you’re looking for more on consumer loyalty, check out my latest post at http://www.oncardblog.com.

  6. My husband just forwarded me this great quote from Briefing.com today:

    “I’m thinking that we have a market that is absolutely addicted to leverage and cheap money…after an extended binge, enabled by Greenspan the pusher, we ended up in a gutter choking on our own vomit – subprime derivatives etc…but not to worry, our new dealer, Helicopter Ben, is here to lower the price of junk so we can afford enough smack to get us up and wobbling again…think we’ll hit the gutter again? You betcha!” The endless party bowl is back out, which is OK “I guess there’s no problem if you’re ok with $100 oil, $1000 gold or $10 for a loaf of bread…”

    That’s good stuff…..party on!

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