Don’t put MBAs in charge of loan servicing
Paul Jackson reckons that the idiotic way in which GMAC/Ally is handling its defaulted loans is partially a function of the thankless nature of the work:
The loan servicing shop is its own world, with its own management â€“ and none of this management typically has anything to do with the upper management within the banking institution itself…
The talent gap between the front office and the back end of a mortgage operation can be substantial â€“ the most talented financial minds, and the best trained and most experienced managers, donâ€™t typically find themselves falling into default management as a career. The pay scale simply isnâ€™t there. Banks donâ€™t require future managers to spend time working a turn in default management, either. The Harvard MBAs go elsewhere, and donâ€™t bother themselves with getting their hands dirty on the default side of the business…
Now, itâ€™s the same management-talent gap that is wreaking havoc for the biggest of banks and their servicers.
The implicit assumption here is that if the Harvard MBAs had gone into default management, the outcome would be better than what we’re seeing now, rather than worse. Does Jackson really believe that? I certainly don’t.
Yes, the situation we have right now is pretty gruesome. But I suspect it’s not a function of incompetent staffers in default management, so much as it’s a function of those Harvard MBAs higher up the org chart systematically depriving the default-management operations of the staff and funds they need to do their jobs properly.
Default management is not rocket science. It requires conscientious and diligent work; it doesn’t require talent. The kind of people who are good at such things also tend to be good at hiring their successors and generally doing their job perfectly well without much if any oversight. The problem isn’t that senior management is divorced from default management, it’s that senior management thinks it can squeeze costs and the people actually doing the work, without worrying about the far-reaching potential consequences.
So Jackson is absolutely right about this:
At what point does it behoove senior management at the board level of a bank to sit â€śChainsaw Alâ€ť down and explain to him that â€śstreamliningâ€ť operations at all costs is actually counterproductive? At what point does a bankâ€™s board decide that default operations are important enough to merit a more substantial investment in people and process, rather than continuing to push default management under the proverbial rug and being content to play whack-a-mole when problems inevitably pop up from below?
Go follow that link to a classic Tanta post, and you’ll see something approaching the platonic ideal of how a loan servicer should do her job. And obviously Tanta was an exceptional person in many ways: no bank can just decide overnight to hire lots of people like her. But it seems to me that the best thing to do here is simply empower the managers in that arm of the organization to spend what they think necessary, even if they’re not on the management fast-track. Budgets will go up in the short term. But tail risk will come down enormously.