Reply To Peppers And Rogers On The Subprime Mortgage Mess

In their weekly 1:1 Media email, Don Peppers and Martha Rogers addressed the subprime mortgage situation with a piece titled “Subprime Woes Shows Consequences Of Short-Termism.” In it, they wrote:

The situation serves as a lesson for companies fixated on the short-term bottom line. It dramatically illustrates that neglecting a customer’s long-term situation can devastate customers. Some of these subprime lenders may have thought they were being customer-centric by making low-interest home loans available to consumers who wouldn’t otherwise be able to get them — people who had little credit or a marginal financial history. But the companies didn’t advise these customers on the potential dangers or long-term implications if interest rates rose substantially or financing changed. A lesson here for all companies is simply this: If any of the ways you make money will not be good for customers, figure out a better way to make money that brings what’s best for the company and what’s best for the customer into alignment.”

My take: While it’s nice to see that they agree with what I said at the end of my post on customer-centricity 🙂 — they didn’t touch on two very important factors in this situation:

1) Compensation structures.
It wasn’t so much a focus on short-term versus long-term results that drove those lending decisions as it was the reward and incentive structures of those firms. What would Don and Martha expect those salespeople to do — turn away customers? They would have if they had been compensated to do so. I couldn’t agree more with Don and Martha about firms figuring out how to align their business models with what’s right for their customers. But a core part of that alignment is aligning rewards and incentives of employees — and simply taking a longer-term (vs. short-term) focus would likely have changed nothing about that.

2) Personal accountability. Was it really the responsibility of salespeople (or the lender) to advise customers about the dangers of rising rates? When you buy a house, is it the responsibility of the realtor, seller, or mortgage provider to warn you that housing prices might go down? Is it the responsibility of a car salesman to tell you that Consumer Reports gave the car he’s selling you a lousy rating? No. With all the hoopla about the influence of word-of-mouth, where were these customers’ friends and family when they were making bad borrowing decisions? And why didn’t they do some research about the decision they were making? In all likelihood, they did — do research and get advice from friends and family, that is. But they went ahead and took the risk.

So let’s get this straight: Consumers went looking for loans, lenders paid people to sell these loans, and customers decided on their own free will to take the loans. And now someone wants to come along and blame “short-termism” for the situation? Sorry, I’m not buying it.

We live in a society (here in the US, at least) that places great emphasis on owning your own home. Many people who suffered “subprime woes” were simply trying to get their piece of the American dream. At the time, the lenders were heroes for helping them make it happen — but now they’re the villains, when the situation turns for the worse.

The root of the problem isn’t “short-termism” — the situation is far too complex for such a simple explanation.

More central to the problem is the general lack of affordable, appropriate, and objective financial advice — and the unwillingness of consumers to pay for that advice, even if it was available.

On one hand, the financial services industry has not found a way to provide objective advice to the masses.

But, on the other hand, many consumers don’t take sufficient responsibility for managing their financial lives. They just don’t put a lot of time and effort into managing their money. I don’t mean to sound critical. It’s their choice, and I respect that. But to absolve themselves of blame — or for a management consultant to absolve them of blame — is simply wrong.

The good news — for future borrowers — is that that the future is likely to be different (and better) for three reasons:

  1. Experience. Investors who suffered through the dot-com meltdown are far wiser today, and — just as importantly — tell their stories to newer investors who learn from them. So it will likely be with the next wave of home-buyers, who will learn the dangers of rising rates from today’s borrowers.
  2. Involvement. Today’s Gen Yers and even the next generation after them — the borrowers of the future — are a lot more involved in the management of their financial lives than today’s Boomers and Seniors were at that age. It’s surprising how many Gen Yers are already thinking about and saving for retirement.
  3. Technology. Sites like Wesabe offer the promise of sharing objective information with the network — and getting that information out faster than it was disseminated in the past. And it be long before larger, more established FIs follow suit.

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p.s. I do believe that there is great financial advice to be had. But much of it either: 1) centers on the deployment of assets, not the disbursement of funds; 2) requires a lot of assets on the part of the customer to be able to access that advice; or 3) isn’t objective.)

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