Developing a new generation of mortgage banking leadersAn industry ‘call-to-action’

by Carol Hartman and Glen Corso

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 top-

level 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.

Developing a new generation of mortgage banking

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,

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.

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.

General Counsel

This legal leader goes way beyond serving solely as

your in-house attorney. An effective general counsel

in the current marketplace must be a trusted partner

responsible for minimizing legal and regulatory risk,

while being equally committed to achieving the

company’s overall business objectives. A general

counsel today must have the judgment to balance

business risk with legal risk, and make difficult

decisions accordingly.

Chief Financial Officer

A CFO today needs to do more than accounting and

tax work. This individual acts as a senior member

of the executive team with the credibility to attract

institutional investment and provide transparency

in financial reporting and financial management.

Access to the capital markets and deep experience

with clients, regulators and investors is needed as

the industry moves to a new normal.

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.

Chief Compliance Officer

The head of compliance role is now more important

than ever, due to the total number – and complexity

– of new regulatory edicts. This executive is charged

with instilling a company-wide compliance culture

through employee training and education. The

chief compliance officer will work closely with

the general counsel to minimize regulatory risk. A

key responsibility of the position is ensuring that

employees adhere to appropriate processes and

procedures to keep business activities in compliance

with regulatory requirements each day.

Chief Information Officer

The requirements of the GSEs and other partners

in the mortgage ecosystem now require massive

data collection and reporting. All of this data

capture, including the financial information, is the

responsibility of the chief information officer (CIO).

Each entity requesting data is likely to require

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.

Five critical positions

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.

Carol Hartman PartnerCarol 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.

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.

+1 415 983 7730

chartman@caldwellpartners.com

Glen Corso General CounselGlen 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.

About the authors

Headquartered in Toronto, Caldwell

Partners has emerged as the fastest-

growing 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.

www.caldwellpartners.com

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