Seven years ago, mortgage lending suffered an industry wide traumatic shock with the collapse of the mortgage markets and the death of the “no documentation pay option” loans and others of their ilk. It was a devastating blow that knocked us back so hard that for many it has been difficult to recover. On top of that destruction came an influx of laws and regulations that are attempting to resurrect the industry with a plethora of consumer focused requirements, multiple reviews and million dollar fines. The industry is certainly not the first to experience this type of devastation. Other industries, such as the steel industry and even countries, such as the Nepal earthquakes have suffered in this way. Many natural and man-made disasters fill our news. Individuals have also suffered blows to their lives and fortunes that tossed their emotions upside down. So whether it be people, industries or nations, a period of disorientation occurs after a seismic event such as this and we struggle to make everything “right”. So what can we expect; what stages must be processed and traveled through in order to regain our “normal” self? There is some guidance available.
In 1969, a Swiss-American psychiatrist named Elisabeth Kubler-Ross studied the emotional journey among people facing death. From this experience she identified various stages that we pass through and documented her findings in a book entitled On Death and Dying. In conducting this study she identified first five (5) and later seven (7) stages that must be processed. These include:
- Shock or Disbelief
- Acceptance and Hope
Frequently, as more and more individuals, psychiatrists and recovery organizations processed the traumatic events they encountered, the more these stages came to be recognized as not only steps taken by the dying, but by anyone and any entity recovering from a life-changing occurrence. In the “Change Management Blog” (July 14, 2009), there is a discussion of “The Grief Cycle” that describes how this very model is finding its way into management and organization dynamics. While not every individual experiences these steps in a fixed sequence but in fact may be experienced in different phases at different times. In other words this is not a linear progression, but a series of phases that we pass through on our way to becoming “normal” in the new reality. So in what stage do we find much of the industry and what we think will be the new management model once we finally reach “Acceptance”?
Stage 1: Shock or Disbelief– This stage involves an initial paralysis at hearing the bad news. There is no doubt that as markets began to reach their pricing saturation point and companies began to fail, there was a sense of disbelief among many lenders. They looked on as these companies, many of them small lenders, began to close their doors as repurchase demands escalated due to defaults because consumers could no longer refinance out of an excessive high payment adjustments. The common belief at first was that this was just a “market correction” which had occurred frequently in the past. But it didn’t stop and as the crisis grew more and more, lenders watched in shock as their companies collapsed or moved closer to failing. By fall of 2008 it was obvious that this was no short-term problem, but a major collapse of financial markets around the world.
Stage 2: Denial– In this stage those involved are trying to avoid the inevitable. As the crisis continued it became evident that at the heart of the financial collapse were the defaulting mortgage loans. Accusations of the abandonment of sensible credit policy and underwriting standards flew from everywhere including The White House, the Hall of Congress and the hometown consumers. Mortgage lenders tried in vain to argue that it wasn’t these loans that were at the heart of the problem, but that the economy in general had suffered which then drove borrowers into default. In other words we denied that this could have been, in any way, shape or form, caused by us.
Stage 3: Anger- This stage embodies the frustrated outpouring of bottled-up emotions. The anger phase began when we recognized that denials could no longer continue. At this point we began to display outbursts of frustration as the government stepped in to slow the rate of defaults and address the growing anger from consumers over the loans that they felt were unfair. We are all familiar with HAMP and HARP and other programs that overwhelmed the servicing operations that resulted from these actions. We began to push back against legislators that were bound and determined to pass new legislation against the egregious lending practices that had caused the crisis in the first place. Lenders loudly exclaimed that these loans were the result of a few “bad apples” that had since been closed down and the industry was fine without any more legislation. It was also in this stage that many investors began to file multiple lawsuits against banks and mortgage operations. These lenders were the entities that had originated the loans that had defaulted and caused billions of dollars of losses around the globe. Lenders prepared to “do battle” with these entities since they continued to believe that it was the economy that had caused the collapse and ultimately the loan losses.
Stage 4 and 5: Bargaining and Guilt– In these stages an initial belief begins to form in the hope of avoiding the cause of the grief or overcome the feelings of remorse. As it became more and more apparent that these issues were not just going away, the industry began to bargain. First there was the attempt to bargain with Congress over what would be contained in the new legislation under development. Many industry leaders testified before the House and Senate explaining how their programs worked and showed how new legislation would cause consumers more harm than good. It was also during this time that individuals and companies began to meet with those individuals and investors who had been harmed by the crisis and were in the process of suing. Large banks, which had swallowed many of these companies and their loans found themselves trying to bargain with the investors in order to reach a settlement.
Stage 6: Depression- In this stage the parties involved becomes saddened by the certainty of the outcome. As it become more and more evident that the effect of the new regulations and the impact of the changes underway, lenders tended to apparently give up hope of being part of companies that met the new standards and that made money. There were numerous comments made at the Secondary Conference about the number of reviews that had to be done, the changes underway in the process, the new disclosures and the lack of a private secondary market that was deemed to be a vital part of the recovery. There was an air of sadness throughout the attendees which seemed to be focused on getting through or giving up. One lender stated he was better off closing up the mortgage business and starting a totally different type of company. In many instances it appears that quite a few members of the industry are stuck in this stage. Many appear to have given up hope that the industry will ever be as vital and dynamic as it has been in the past.
Stage 7: Acceptance-In this stage individuals embrace the inevitable future. Today it appears that only a very limited number of industry members have reached the stage where people learn to accept and deal with the reality of the situation. In fact there has been very little discussion about what the industry will look like once we finish with all the new regulations and associated process and technology changes. So what changes will stay with us and how will the mortgage lender of the future adjust?
One of the basic issues that we had to face during this grieving process was the fact that many independent mortgage lenders never were forced to operate in a regulated environment. While the banks, particularly the larger ones have always inculcated a regulatory approach into their operations. This will be new to many lenders. While frustrated and anxious about the new regulations and the new regulator have been at the forefront of our efforts in the past few years, the regulators influence will not disappear once the regulations are in place. We can expect that this “data driven” organization will continue to expect a higher level of management on operational risks and consumer satisfaction. Management will no longer be able to delegate these issues to attorneys or quality control staff. They will have to incorporate a broader focus on the overall management of the company’s operational policies and procedures as well as overall risk management.
Ultimately this will lead to a new type of senior manager. The new CEOs can no longer afford to be “production” focus. While in the past, operational and credit issues were assumed to be compensated for by producing more volume, this will no longer be true. Managers will need to understand the entire interrelated functioning of the operation. They will need to be able to obtain and evaluate data produced by their organization and be able to compare themselves to the industry to identify risks. They will also need to evaluate the ROI of products and projects, hold people accountable for more than production and be able to explain the operational evaluation and improvement process to any regulator that walks in the door.
Lenders will also have to refocus their thinking when identifying their customers. Prior to the crisis the most important customer was the investor. Many loans were approved based simply on the fact that a specific investor or lender would buy the loan. It was not uncommon to hear management ask “Can it be sold?” when trying to make a decision on whether or not to accept a loan. This will change as we refocus on the consumer as a customer just as important as an investor. While much of this is driven by the CFPB, it is also the result of new technology and new consumers who conduct their financial activities through electronic devices.
While the seven steps of death and dying may seem to some to be a bit of an exaggerated means to demonstrate what we have been through and where we are going, we have to recognize that we still have some processing of grief over the loss of our familiar and profitable mortgage lending environment. As studies on this subject have shown the stages of grief exemplify the basic process of integrating new information that conflicts with previous ideas and beliefs. As such we need to realize that it is important that we move forward in order to allow our industry to reemerge as a vital and contributing part of the economy.
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