Skin In The Game

Today’s buzz words for figuring out how to “solve” the current mortgage crisis is for every player to have some “skin in the game”. The Financial-Directory describes the phrase ‘skin in the game’ as

“Informal; a situation in which an executive in a publicly-traded company uses his/her own money to buy stock in that company. It is fairly common for an executive to receive stock as compensation or to exercise stock options to buy stock at a discount. It is less common for an executive to risk his/her own money in the company for which he/she works as if he/she were an outside investor. Putting skin in the game is seen as a sign of good faith or a show of confidence in the future of the company. The term was coined by Warren Buffett.

Lets look at why “skin in the game” may not be the end all answer in mortgage lending.
Historically, the mortgage industry players valued production numbers first and took loan quality as a “given” as the loan passed from originator, to wholesaler, correspondent lender and on into the secondary market trades. Each one in turn trusted the quality of the loan as it had always been a “trustable” commodity. As our country’s morals were slowly decaying, mortgage interest rates were quickly declining and easy mortgage loan programs created a wind storm of new activity in lending. These three things converged to blow in the winds of change along with huge commissions for those working in the mortgage industry. Loan officers, both retail and wholesale, were earning six figure incomes as their support staff, formerly earning $30K were now earning $60K+ with their production incentives. And those on Wall Street’s mortgage side were achieving new income heights of their own, again based on volume, not quality.

The word of ‘easy mortgage lending’ spread quickly and those folks who formerly knew nothing about lending were now passing out business cards touting themselves as “mortgage experts”. In states without licensing a consumer could fill out a mortgage loan application with the loan officer/hair dresser while getting a shampoo.

Once, while checking references of an employment applicant, her former employer, a shop keeper in Modesto, told me she worked his kiosk in the mall selling jewelry. If someone wanted a mortgage loan she also gave them the paperwork for that. My question: “Did she quote rates and explain the programs?” Answer: “She quoted rates but we sent the loan papers to my brother-in-law and he got the thing funded”. He verified that he paid her $55K that year. Not bad for a kiosk clerk! Note: We did not hire her due to her minimum knowledge of mortgage lending. A year later I couldn’t help wondering if some of the foreclosures in the Modesto Fresno area were people who bought a necklace and a mortgage loan at a kiosk.

At the end of the day it was all about money. Big money. Ethical loan professionals who had transacted mortgage loans for many years may not have had “skin in the game” in the form of money as the definition above implies. However, any ethical business person knows the ‘skin in the game’ is often good reputation and future referrals; in the loan business that is better than gold.

Not every loan person lied or has lied. Not every loan person cheats or has cheated. Sadly, those who did soured the industry and today onerous regulations are coming out of Washington to “solve” the problem. It is a human condition that good, strong ethical behavior can not be regulated or mandated away by government degree.

What do you think? Does putting money on the table make a person truthful? Ask a poker player.