Putting Others First in Business
What’s the difference between putting others first in business and putting profits above all else?
Well, as it turns out – a whole segment of business can be killed! Let me explain… Back before the mortgage crisis of 2007, I was a mortgage loan officer. My specialty – subprime.
Whoa! I know – that’s the whole thing that caused the mortgage crisis to start with! Yes, it is. And yes… I am willing and actually proud to admit that I was a subprime loan officer.
You see, when I was in the subprime market, I felt like it was a very good thing. I still feel that way. Why? Because at the time, I was actually helping people who had dealt with challenges to achieve a dream of theirs. But I did not do it in shady ways.
Subprime, in and of itself, was a good thing. It offered home loans to people who may not have had the perfect past, and fully understood that the price of that not perfect past would be a higher mortgage rate than those with an 800 credit score. There were some wonderful programs available for those who may have been less than perfect that not only met their needs and their budget, but also had a reasonable amount of risk built into the rates for the lenders.
Good products and services, aimed to fulfill the needs of good customers, is a win-win scenario.
Someone with around a 620 credit score and solid rental payment history could put 10-15% down on a home and have a rate that was around 5-7% above the standard rates at the time. The buyer had an actual investment but within a budget they could afford with a track record of doing so, and the bank made a bit more money to offset the risk associated. Even if the bank had to foreclose, the bank was in a positive position when it came to having to sell the house because of the initial down payment of the buyer. All in all, it was very much a win-win for everyone.
As a mortgage loan officer, I had a number of options when it came to how I helped a customer. Yes, there were the 2-28 and 3-27 adjustable mortgages (loans that locked in the first 2-3 years and then became adjustable afterwards), but there were also some pretty good 15, 20 and 30 year fixed rate plans available as well. I primarily used the fixed rate loans, leabing the It was truly about finding the right loan for their needs, both now and for the future.
As with traditional lending, my compensation came in two possible ways…
- Origination Fees – a fee paid by the borrower to help originate the loan
- Yield Spread Premium – the ability to sell the rate to the borrower above what we could obtain the rate for and get paid for the difference.
In both cases, the compensation was always disclosed to the borrower, which kept things on the up and up. The borrower knew they were paying a premium in some way in order to get what they wanted – a home that was theirs, and a payment that wouldn’t continually increase every year like their rent.
For me, when dealing with a client, I would try to strike a balance between the two. If they had more available cash on hand to allow for the origination fee, then I could keep the rate closer to the buy rate, which saved them more over time. But if all they had in funds was just enough to buy the home they wanted, I would minimize the origination and bump up the rate to compensate. Again, it was very much dependent on the customer’s situation and need, and I was always transparent in how I was putting together the deal. 99% of the time, the borrower was thrilled and more than happy to proceed.
I felt this was a solid trade off, helped the borrower obtain the home they wanted, and it allowed me to make a decent living. I was helping people achieve their dreams while being able to achieve my own.
Greed can not only kill your business, but a whole market segment!
There are a lot of higher level issues that ultimately lead to the dominoes crashing down, but I truly believe that the basis started much sooner. While there were really shitty bonds being sold as good bonds in the financial markets, the real issue was that the bonds were shitty to start with. The shitty bonds were the result of greed, both with lenders AND loan officers.
You see, subprime lending was a huge money maker. Lenders were able to charge higher rates, and when most borrowers paid their mortgage payments each month, they truly were winners. However, the lenders got more aggressive – lower down payments and lower credit scores helped to drive up their sales, but then also dramatically increased their risks. When a borrower only needed 5% down, no mortgage insurance and only a 540 credit score with questionable rental history, they opened themselves up to buyers who weren’t yet ready to buy – and often only considered buying because they were told how easily they could qualify. The marketing became more of a pitch to sell the dream to those who were not yet in position to do so, which pushed more people still making bad financial decisions to make further bad financial decisions.
Unfortunately, a high percentage of loan officers were greedy and maxed out both the origination fees and yield spread premium on shaky loan qualifications, placing many buyers in a truly precarious position. All of this on top of a 2 year adjustable loan where the buyer did not have the time to prepare for a big payment hike, and this became a recipe for disaster. These loan officers cared more about how much they could make off each client than they ever did for the client themselves.
Ultimately, the missed their calling. To be a subprime mortgage loan officer meant to help those who were trying to do better get to a better place. But for many, it was just quick and easy money. They took advantage of the most aggressive loan programs targeting those who were not yet ready and sold them on a dream they could not afford – usually knowing that the customer would eventually fail to keep up.
When you do business that you know is very likely to fail, you are indeed adding to the ultimate failure of the overall business itself.
Over time, more and more of the subprime loans written fell into the most aggressive of loans, with the most risky of borrowers. As long as the loan officer could make as much as they could, and the lender could then sell off the loan to someone else to cash out their money, the quality of these loans continued to get worse. As time continued, and more of the risker adjustable mortgages started to change, more and more borrowers could not afford the increased payments and defaulted. With defaults rising, the quality of the loans that were packages into these bonds became worse and worse – adding up to shit bonds being sold as if they were still good ones.
Eventually, there came a tipping point and the whole damn thing came crashing down. Burned by the increased risks, lenders overcorrected and made borrowing nearly impossible for anyone who didn’t have perfect credit. Law makers were outraged (as they should have been), but as lawmakers often do, they overcorrected as well. Not understanding how any of it should have worked to start with, they simply saw a way to look good to their voters by basically banning the “evil subprime” type of loans. Suddenly, a huge segment of people were shut out of the possibility of buying a home, and millions of people lost their jobs in the mortgage industry… including myself.
I’m not saying that corrective measures weren’t needed… they were. But because of the overall greed that was involved throughout the industry, the corrective measures basically killed off a whole market segment that actually could have done a lot of good for people as a whole.
The point being… when you care more about the money than the customer, you are not only doing the customer a disservice – you’re doing the same to yourself. You may make a bit more while the ride is in motion, but eventually that well is going to dry up and take you with it.
Always put others first in how you approach business.
Whatever you are selling should fulfill a need, solve a problem and add value to the customer’s life. You should never knowingly and willingly place the customer in a negative position – to do so may feed you for a moment, but eventually both you and the customers you have “served” will pay a very high price.