Developing a new generation of mortgage banking leaders

Transcription

1 Developing a new generation of mortgage banking leaders An industry call-to-action by Carol Hartman and Glen Corso

2 Developing a new generation of mortgage banking Executive Summary A shortage of mortgage banking executive talent has been building for a decade, but the financial crisis has left the industry without the leaders it needs for the next decade. Since 2009, mortgage banking regulation has become significantly more complex. At the same time, capital requirements for the industry have been increased. To satisfy the higher levels of capitalization, some mortgage banks are going to the capital markets to raise money and many more may need to do so in the foreseeable future. In this environment, the entrepreneurial executives who built the largest mortgage companies may not be the most well-positioned to secure capital from traditional sources in the financial markets. To succeed, the management teams of many mortgage banks will need to be complemented by executives who not only have credibility in the capital markets and with regulators, but also understand the entire mortgage banking ecosystem. This industry challenge comes as other companies in financial services that pay more or command more respect are vying for the same executive talent. Banks, hedge funds, private equity firms, law firms and accounting firms are all scrambling to find senior-level executives who can operate in a more regulated environment. In short, the mortgage banking industry is in danger of losing the recruiting battle, based on recent experience in securing toplevel talent for mortgage banks. The urgency of the issue is further complicated because the founders of successful firms are in unfamiliar terrain and are uncertain about hiring executives who are generally more risk averse. This white paper is intended to define the task ahead for the industry and offer suggestions for cultivating a new generation of five key officers: general counsels, chief financial officers, chief risk officers, chief compliance officers and chief information officers. Authors Glen Corso of National Mortgage Insurance (National MI) and Carol Hartman of Caldwell Partners are two of the nation s recognized experts on mortgage banking and executive recruiting. Corso has more than 35 years of experience in the mortgage industry, and Hartman has more than 20 years of experience in executive recruiting in financial services for Caldwell Partners, one of the largest executive recruiting firms in North America. This white paper will explore a list of possible industry solutions including the following: Recruiting more seasoned managers with experience in highly regulated segments of the financial services industry. Increasing the compensation to compete with hedge funds, law firms and accounting firms. Raising the level of professionalism in the mortgage banking industry. Aligning compensation for CFOs, risk and compliance officers to reduce risk and encourage responsible management.

3 Mortgage banking stands at a turning point. Institutions that recognize the industry s new dynamics can transform this challenge into an opportunity. Those that don t recognize that the world has changed will likely be left behind. The mortgage industry today The financial crisis fundamentally changed the mortgage banking business in several ways. First, regulators are insisting on executives who have significant risk management experience and are comfortable working within the financial system. The collapse of Countrywide, New Century and other mortgage lenders triggered the global financial crisis, and regulators are focused on avoiding a repeat of that meltdown. Unlike banks and brokerages, which have traditionally been held to a higher standard, mortgage banking companies have operated in a less restrictive environment. With new regulation resulting from the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB), the days of more moderate regulation for the mortgage industry are over. Second, mortgage banking companies face even more competition for executive- level positions. Commercial banks, brokerages and hedge funds, along with professional services firms, are all looking for the same talent as mortgage banks. However, compensation at banks, brokerages and hedge funds remains higher. Likewise, law firms and accounting firms often offer more attractive compensation than mortgage banks. Professional services firms may offer equity as well as partner titles, two career-building benefits that mortgage banks either can t match or are reluctant to provide. For highly accomplished professionals, an established law or accounting firm can offer more stability and prestige than a firm in a battered industry in the midst of transition. A higher standard Regulators today are demanding that mortgage banking companies become more like their regulated competition. As a result, mortgage banks will need a different breed of executive those who have the experience and sophistication to work productively with regulators. Equally as important, the next generation of mortgage banking executives will need substantially more capital markets and regulatory experience. Mortgage banking executive teams will also be required to build robust risk management infrastructure and strengthen their commitment to best practices. To meet the challenges, mortgage banks need to do the following: Prioritize institutional experience Mortgage banks need to concentrate on hiring executives who have proven success working with the FDIC, Comptroller of the Currency,

4 Federal Reserve and the Securities and Exchange Commission. Many of the executive managers currently running mortgage banks grew up in an industry that was far less regulated and scrutinized. In the past, these senior positions were viewed as overhead and an impediment to production and the bottom line. Today, mortgage banking executive teams need a new set of partners who understand the realities of the current financial environment. To that end, previous work with institutional investors will be a highly valued skill set for CFO and CRO leaders. The capital requirements needed to operate mortgage banks, combined with good financial returns, will attract world-class investors. However, investors of this caliber require sophisticated finance and risk leaders who can provide proactive, appropriate information about operational and financial performance. Also critical is that institutional investors need to know that proper succession planning has been done. Deep bench strength in these critical positions has become essential. Attract scarce talent The mortgage banking industry, as a career path, is not well understood by the broader financial services community. The mortgage banking problems over the past few years have created an impression of excessive risk from a professional development perspective. Consequently, executives with the necessary institutional and regulatory expertise not only have other choices in sectors with which they are more familiar, but also need to be better informed about this sector as a promising career path. Compensation for the executive leadership positions highlighted in this white paper have been significantly rising in recent years. Change the current perception of the industry The mortgage banking industry has been the Wild West of the financial services industry, dominated by colorful personalities and entrepreneurs. The level of professionalism will need to improve significantly across the industry to meet the demands of regulators and institutional investors. This requirement will require a new breed of executives who can work across multiple public constituencies and communicate more proactively and effectively than they have in the past. Align compensation to avoid functional conflicts-of-interest To build the right checks and balances into mortgage banking companies, the heads of risk and compliance should report directly to the chief financial officer or the chief executive officer. A clear line of authority is essential to ensuring that their roles are not compromised. Similarly, these managers should not be incentivized for increasing production. That direct conflict will undermine the primary responsibility of risk managers. Instead, compensation programs need to be built to financially reward prudence. Compensation for these executives can include reducing loan losses and/or increasing the FICO scores of borrowers to established benchmarks.

5 Five critical positions General Counsel Chief Compliance Officer This legal leader goes way beyond serving solely as The head of compliance role is now more important your in-house attorney. An effective general counsel than ever, due to the total number and complexity in the current marketplace must be a trusted partner of new regulatory edicts. This executive is charged responsible for minimizing legal and regulatory risk, with instilling a company-wide compliance culture while being equally committed to achieving the through employee training and education. The company s overall business objectives. A general chief compliance officer will work closely with counsel today must have the judgment to balance the general counsel to minimize regulatory risk. A business risk with legal risk, and make difficult key responsibility of the position is ensuring that decisions accordingly. employees adhere to appropriate processes and Chief Financial Officer A CFO today needs to do more than accounting and tax work. This individual acts as a senior member procedures to keep business activities in compliance with regulatory requirements each day. Chief Information Officer of the executive team with the credibility to attract The requirements of the GSEs and other partners institutional investment and provide transparency in the mortgage ecosystem now require massive in financial reporting and financial management. data collection and reporting. All of this data Access to the capital markets and deep experience capture, including the financial information, is the with clients, regulators and investors is needed as responsibility of the chief information officer (CIO). the industry moves to a new normal. Each entity requesting data is likely to require Chief Risk Officer The CRO provides enterprise-wide visibility and assessment of risk usually inclusive of operational, enterprise and financial elements. By measuring risk across all aspects of the firm, better, more comprehensive decisions can be made by the CEO, board and other leaders. That will improve the allocation of precious resources and bring clarity to risk/returns of various options. A CRO is also an important member of strategy team for the reasons mentioned above. different information, so the position demands a high degree of responsiveness and an ability to deliver customized information. The CIO in today s mortgage banking industry must possess a strategic understanding of the role and recognize the importance of enterprise-class systems and data capture for regulatory, shareholder, risk management and marketing purposes, among others. With many bank systems requiring significant upgrades due to new regulatory requirements, the CIO will need proven change management capabilities and experience managing teams responsible for eight- or nine-figure project budgets.

6 Focus on five critical positions Mortgage banking survivors have tended to be small- and mid-sized firms that were more agile and had lower risk and cost profiles through the crisis. To meet government-sponsored enterprise (GSE) capital requirements, these firms will be tasked with securing institutional investors or face consolidation. Additionally, the industry has not been in a position to groom the next generation of leaders for a long time. The shortage of existing leaders with the backgrounds and insights described (previous page) will require the mortgage banking industry to seek executives from a broader population within financial services including banks, broker-dealers, regulators and institutional investors. There is little time before firms will be called upon to attract sophisticated institutional investments, provide succession planning alternatives and answer broader regulatory demands. To succeed in this post-dodd Frank/CFPB world, mortgage bankers need to focus on developing and filling the key positions of general counsel, CFO, chief risk officer, chief compliance officer and chief information officer. Industry faces an immediate call-to-action The mortgage banking industry needs to move quickly to develop a new generation of leaders. Anecdotal evidence from our experience suggests that mortgage banks face an uphill battle in finding the right talent. Moreover, the cyclical nature of the mortgage business will continually challenge boards and executives to invest in the next generation of talent when they inevitably face short-term cost pressure due to changes in the housing market or economy. Mortgage banking stands at a turning point. Institutions that recognize the industry s new dynamics can transform this challenge into an opportunity. Those that don t recognize that the world has changed will likely be left behind.

7 About the authors Carol Hartman Partner Carol Hartman is one of the nation s leading executive recruiters in the financial services industry. Carol, who has 20 years of experience, focuses on banking, asset management, private banking and wealth, risk, compliance, and retirement income. She also has worked with private equity, real estate and startup companies. Carol is often retained to help clients in other industries recruit senior financial officers and board members. Glen Corso General Counsel Glen Corso is an expert in private mortgage insurance legal and regulatory matters and public policy. He has over 35 years of experience in mortgage regulatory and legislative affairs, as well as government relations for private mortgage insurance companies. Corso also founded and managed a policy and lobbying group for independent mortgage bankers. In 2009, Carol joined Caldwell Partners from a boutique firm she founded 15 years prior. Before becoming an executive search consultant, she held positions with Oppenheimer s ALM Group, Kidder Peabody, Dean Witter Capital Markets and Sutro & Co. Carol is a member of the board of trustees at Claremont McKenna College. She also serves on the board of advisors for both the Henry Kravis Leadership Institute and the Financial Economics Institute. She also is a leader in the Retirement Income Industry Association. Carol has a Bachelor of Arts in economics from Claremont McKenna College chartman@caldwellpartners.com

8 Headquartered in Toronto, Caldwell Partners has emerged as the fastestgrowing executive search firm in North America. With offices across the United States and Canada, and partners in Europe and China, our size gives us the resources and market presence of an international firm, yet allows us to remain nimble and highly accountable to our clients. Simply put, each client and every assignment is singularly important to us. Our reputation over 40 years in the making has been built on successful searches for boards, chief and senior executives, and selected functional experts. Few can match our experience. None matches our service. Copyright 2013 Caldwell Partners International and National Mortgage Insurance. All rights reserved. Reproduction without permission is prohibited. Trademarks and logos are copyrights of their respective owners.