DRIVE through the typical American neighborhood these days, and you will see disturbing signs of the housing collapse. Whether advertising homes for sale or foreclosures, these signs stand as evidence of leadership failures in the mortgage market.
What happened to create the mortgage mess? What leadership lessons can be drawn from the situation?
The (former) homeowner
Although the housing decline has been fueled by a variety of complex factors, the mortgage mess was predicated upon a basic human vice—greed. No segment of the industry has been exempt from greed, and the behaviors of homebuyers, mortgage brokers and investment bankers alike have contributed to the crisis.
Homebuyers yielded to the great American temptation of living beyond their means. Many undertook obscene amounts of debt to finance homes that their income could not support in the long run. Lacking the discipline to save for a down payment, they recklessly entered into interest-only loans or adjustable rate mortgages. As long as the home value increased, they stayed afloat. However, when home prices plunged downward, these buyers found themselves living in homes worth less than the money they owed for them.
The lesson: Patience
Walk before you run. Get rid of consumer debt before making major purchases. Build savings before you build a home.
The (broker) mortgage broker
During the housing bubble, mortgage brokers profiteered at the expense of uneducated homebuyers. Since the brokers’ pay was based on commission, they had incentive to push consumers into buying bigger houses than they could afford. Brokers pressured homebuyers to overstate their earnings, and deceived them into making dubious choices on their mortgages.
For a time, the brokers raked in money. Then the economy took a downturn. Suddenly, everyone was looking to sell and no one wanted to buy. Business for the brokers went dry. As homeowners began to face foreclosures, the mortgage industry fell under greater scrutiny. News outlets exposed the most flagrant abuses committed by brokers, and society began to view them as dishonest middlemen. Consumers began bypassing them to work directly with lending institutions, leaving many mortgage brokers jobless.
The lesson: Honesty
Ethical shortcuts lead to unsustainable successes. While deceitful mortgage brokers amassed wealth, they unwittingly sabotaged their careers and livelihoods.
The (bankrupt) investment banker
Impaired by greed, investment bankers leveraged their portfolios too much in the hopes of cashing in on soaring home prices. Through an array of complex schemes, they overinvested in high-risk mortgages that had been made to borrowers with poor credit.
As the housing market crumbled, investment banks could no longer sell funds laden with mortgage-backed securities. The value of their securities tumbled as homebuyers defaulted on their loans at record-breaking levels. Giants like Bear Stearns collapsed, the repercussions echoed throughout Wall Street.
The Lesson: Contentment
Not content to turn a modest profit, investment bankers attempted to squeeze every penny of profit from the booming housing market. They ignored the wisdom of a balanced portfolio, and they tried to tilt the scales in their favor by burying questionable investments into complex hedge funds. In the end, they rode the crest of the market for too long, and when the wave fell, they crashed hard.
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John Maxwell is coming to Manila for the John Maxwell Leadership Summit. For information please e-mail us at slvguru@pldtdsl.net, visit www.saltandlightventures.net or call 813-2049/2732. Have a blessed Sunday!
