‘Yes, it is your problem’

Move to the present. Lending is segmented and the lending chain is long, particularly in the third-party arena. There are referrers, credit reps, licensees, aggregators, sales, credit, settlements, collections – each with a part to play in the loan life cycle with roles and responsibilities that are clearly defined. Or are they?

Back in the day when securitisation was ‘fresh’ in Australia (we’re talking the late 1980s), I was fond of describing the financing process in the following way: “Securitisation pulls apart financial transactions and allocates the risks and rewards to those entities that are best able to accept and therefore price them.” Very neat, responsible and rational – the problem was that it didn’t stay way for all that long.

Immediately prior to the GFC this statement had mutated to something like: “Securitisation (particularly the now infamous collateralised debt obligations or CDOs) is so complex that no-one really understands the risks and rewards, but never mind, those entities that are least able to understand them will accept them so long as the price is right. Anyhow once the deal is done it’s not my problem.”

Things like CDOs became increasingly complex and ultimately toxic, but it should be remembered that the vast majority of them were structured by Wall Street’s best and brightest, accompanied by extensive offer documents, legal opinions and carrying AAA ratings from at least two ratings agencies. The chain from an individual borrower to the purchaser of a CDO was exceedingly long. Each link in the chain thought that they’d ‘done their bit’ but had lost sight of the fact that the strength of a chain is dependent on the weakest link and a break in one link can lead to catastrophic failure.

The foreclosure crisis, the insolvency of venerated Wall Street investment banks, sovereign debt defaults and the near collapse of the entire global economic system – well, that sure sounds like a problem!

Attempting to ‘contract out’ of ‘long-chain’ financial arrangements by contending that things are ‘not my problem’ puts all in jeopardy, ultimately. 

A phrase that’s crept into the discussion about reforming practices in financial services is: ‘Greed outweighs fear’. Very harsh; it’s almost like an equation. The call seems to be that to reform and restore balance we need to decrease the greed or increase the fear!

The desire to maximise personal benefits is hardwired in our DNA and increasing the fear inevitably means more legislation, regulation, and civil and criminal penalties. The former is probably unachievable and the latter definitely unpalatable. (The Dodd-Frank financial reform rules in USA have grown to a ghastly 8,843 pages.)

So what can be done? We need to reverse the polarity of “It’s not my problem” to “It is my responsibility”. We need to recognise that in the mortgage value chain there is massive interconnectivity, and that the actions or inactions of one party can cause problems for other parties in the chain, like a cascading ‘butterfly effect’. We need to realise that no amount of clever documentation or sophisticated structuring – be it for prime loans, stated income or limited recourse SMSF borrowing – can adequately diffuse or shift home risk to others.

Even the healing balm of professional indemnity insurance isn’t the solution to the “not my problem” problem. If a claim is paid, you can be sure that someone will come hunting to find the culprits and make it their problem.

If one wants to reap the rewards, one must take, not avoid, responsibility.

If you take responsibility – real responsibility – avoiding wilful blindness, practicing ‘responsible scepticism’ and rejecting the reliance on others to fill responsibility gaps, well, continued involvement in the mortgage space for you and your customers is very likely to be ‘not a problem’.