Lessons from the mortgage meltdown.

• Author: Hall, Robert
• Position: Marketing Solutions

The whole commission structure in both prime and subprime, was designed to reward salespeople for pushing whatever programs countrywide made the worst money on in the secondary market," the former sales representative said.

--Gretchen Morgenson, "Inside the Countrywide Lending Spree," The New York Times, August 26, 2007

The Dr. Phil question for the mortgage industry: And, how is that working out for you?

For many of us, there has been considerable concern over the years that sales incentives were designed to maximize the money for the lender at the expense of the borrower. Sure enough, in the recent excesses of the mortgage meltdown we have ample examples that Countrywide and other mortgage players worked hard to devise just such an incentive system. It has given the whole industry a black eye not to mention an economic train wreck. In fairness, politicians, the government, rating agencies and a number of customers also brought their own greed and incompetence to the party.

What was less apparent was just how flawed these incentive systems were in accomplishing their strategic goal. I mean, if they had really worked the way they had intended, Countrywide would not have had to be rescued by Bank of America, right? If they had worked really well, the whole mortgage industry would not be on the ropes, right? The strategy must have been wrong.

Should the incentives be motified?

This is bigger than just the mortgage business. Incentives across all of the financial services industry are now being examined. The Wall Street Journal recently stated it this way: At every level of the financial system, key players--from deal makers on Wall Street and in the city of London to local brokers ... often get a cut of what a transaction is supposed to be worth when first structured, not what it actually delivers in the long term. Now as the bond market wobbles, takeover deals unravel and mortgages sour, the situation is spurring a re-examination of how financiers get paid and whether the incentives the pay structure creates need to be modified....

What is bad for customers is also bad for the bank. Why? Because in a true longer-term business relationship, both parties--customer and provider--must be able to succeed and flourish. Rogue behavior, incented by exorbitant and immediate gains, eventually steals long-term value from all the parties. It moves the business relationship from a "plant, cultivate and grow" model to harvest model that stunts...