I remember it like it was yesterday. Ten years ago, the collapse of Lehman Brothers pulled the U.S. financial system, as well as the U.S. economy, into the abyss.
I was still relatively new to my job, having become CEO of CitiMortgage in July 2008. But after three decades in financial services, including running services in Morgan Stanley’s Institutional Securities Group, I knew there were no good options, only less bad ones, regarding how to get through the crisis. As Tim Geithner, the former U.S. Treasury Secretary observed, “There was a plane going down, the arsonists were on the plane…and your first obligation is to figure out how to land that plane safely.”
With the U.S. economy now flying again, it’s important to revisit the lessons of the crisis to avert another tailspin. Here’s what’s called for now:
1. Seasoned leadership
After Citigroup’s
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fortune deteriorated in December 2007, it named Vikram Pandit as its CEO, and he brought in a new management team. Pandit knew what to do because he was a veteran executive who understood the risks of lending. He surrounded himself with those who had experience in their respective divisions.
Pandit recruited me in part because I had worked at CitiMortgage in the 1990s as a managing director, and for my experience managing mortgage risk. My new role called on me to understand the risks that CitiMortgage was facing, such as credit risk, operations risk, and prepayment risk. Next, I had to reform how the business operated, from how mortgages were underwritten via Citi’s third-party partners to introducing several mortgage assistance programs that reduced payments for those without a job. Keeping people in their homes was a priority for us, and our actions helped to shift the paradigm within the industry.
Now, a decade after the crisis, two headwinds are putting pressure on mortgage companies. First, interest rates are going up. Second, the housing supply is constrained, which has resulted in a sharp appreciation in home prices.
With mortgage applications declining, executives have a choice to make: Should underwriting standards be lowered? When volume becomes the defining metric for how loan officers and mortgage companies get paid, then loan quality deteriorates — and we’ve seen how that movie ends. We in the industry should be mindful not to take shortcuts or return to suspect practices. Those who managed through the great financial crisis won't have to think twice about making the right decision.
2. Responsible lending
These days a fresh crop of startups are eager to lend money to customers. Indeed, I welcome innovation and disruption in financial services. But it’s important that these organizations value responsible lending, from having their salespeople rigorously fill out loan documentation, to their understanding the borrower’s ability to repay. Of course, all Americans should be given an opportunity to borrow, a belief that has bipartisan support. But loans should always be underwritten on the ability of the borrower to repay. Every loan represents a partnership between the lender and the borrower, not just to each other, but to making sure America’s housing market remains robust and resilient.
After the 2008 meltdown, the new team at Citi led by Pandit launched the “Responsible Finance Initiative” in which we made clear that we would help contribute to the U.S. economic recovery, promote consumer choice, and advocate for reforms that benefited consumers. We condensed this initiative to three basic questions: (1) Is what I am doing creating value? (2) Are my interests aligned with those of my clients? (3) Is what I’m doing adding more systemic risk to the financial sector? These questions should guide everyone in the financial services industry, from the CEO running a large bank to the loan officer at the local branch.
3: Dialogue between bankers and non-bankers on emerging risks
As a banker and now as a non-banker, I have come to recognize the importance of looking across the entire industry to identify systemic risks. As the CEO of the third largest non-bank financial company (NBFC) in the mortgage business, Caliber Home Loans, I realize how important NBFCs are to the housing and broader financial services industry. NBFCs now originate about 50% of all new mortgages and have cast a wider net of credit across a broader spectrum of borrowers. We have had a positive experience in providing credit to individuals who have been neglected by larger lenders, as borrowers have demonstrated their ability to repay.
Additionally, the nature of systemic risk has substantially changed. For example, banks and NBFCs are both concerned with credit risk. But the proliferation of NBFCs creates the enhanced issue of liquidity risk, which means having enough capital to service loans. Because there isn’t one single coordinator or regulator of mortgage risks, it’s important for bankers and non-bankers alike to discuss emerging systemic risks.
By heeding the lessons of the great financial crisis, we have a better chance of never again experiencing what we went through 10 years ago.
Sanjiv Das is the CEO of Caliber Home Loans. He was the CEO of CitiMortgage during the 2008 credit crisis.
