Ethics play a large part of who we are as people and this facet plays into virtually any business or industry. As a business, you want your company and your employees to exercise the highest degree of morality and putting the customer first. Unfortunately, this hasn’t always happened in the home loan broker industry as we saw firsthand what happens when ethics take a back seat to profits.
2008 – The Year The Bubble Burst
The year of 2008 started off with a stumble as the economy started signs of slowing down. The American Automotive industry hit rock bottom as the Big Three of Ford, Chrysler, and General Motors received a bailout from the US Government to keep business going. The worst was yet to come as the US housing market started to plummet with foreclosures rapidly going up.
The housing market bubble completely burst that summer as the economy sank even further. Through the haze of the defaults and the foreclosures, investigators found that the firms who suffered the most in foreclosures were the ones who offered the highest risk of mortgages. The appeal of increased commissions was too great to pass up in light of ethical business practices.
Interest Payments and Commissions over Common Sense
The brokers worked out deals with sub-prime lenders who offered so-called NINJA loans which stood for No Income, No Job, and No Assets. These high-risk applicants were approved with no credit history, no documented way to pay, and no collateral. The lenders and brokers wanted a piece of the then-hot real estate market. Home buying and home construction projects were at an all-time high and the ceiling to this market looked limitless. Sadly, every economic bubble bursts at some point as the good times can’t last forever.
Instead of sticking to tried and true standard operating procedures, the lenders and brokers acted out of greed and FOMO (Fear Of Missing Out) and let those two emotions cloud their overall judgement. As a consequence of these actions, the brokers and lenders partially contributed to the short-term demise of the housing industry, and to a greater extent, the long-term economic recession that happened.
Ethics – Putting The Greater Good over Profits
Brokerages should focus on their clients’ needs and be realistic about their clients’ aspirations. There’s absolutely nothing wrong with “keeping it real” when it comes to their financial picture. The $10,000 commission that a broker would make on a $300,000 home mortgage sounds intriguing. But what good would the commission be if the borrower couldn’t afford the payments? The home loan broker has a moral duty to their clients to serve them in the best way possible. This duty also extends to a fiduciary responsibility to both the client and the lender.
This responsibility fosters good relationships with both client and lender and will also result in repeat business. The client will seek out the broker for other financial matters such as financial planning and the lender will keep the broker on a shortlist for future loan relationships. This repeat business can also extend to the client’s friends and family as they will spread the word about their good experiences with the broker. That $10,000 commission that the broker missed out on with the upsell will be replaced by four or five $5,000 commission payments from the friends and family of the client.
Stew Leonard of the famous Stew Leonard’s chain of supermarkets in the New England area of the USA had a famous saying in relation to customer service, every customer is worth $50,000. This figure was in relation to how much the customer would spend in the store throughout their lifetime. If the customer experience was bad and that customer ceased doing business with Stew Leonard’s, then the store would lose out on those future earnings. In actuality, that dollar amount is a low-end figure because that’s not taking word of mouth referrals into account.
Conclusion
Home loan brokers should encapsulate good customer service and operate their service at the highest level. Conducting business on a ethical and moral compass will shed a positive light not only upon their clients but to the industry as a whole.