The financial crisis uncovered a lot of fraud in the financial system, specifically within the mortgage industry. Salespeople are falsifying documents saying someone that make $40k a year actually made twice or three times that amount. Signatures were faked on contracts to close. Inspectors were bribed to say a property was good to go. Appraisals were faked too. And we all know now about the issues with processing foreclosures too.
Everyone had various incentives to lie or cheat. It was one of the primary contributors to the ultimate downfall of the housing market and subsequent recession. But was it all just people being greedy? Were some people too stupid to even understand what they were doing? And, were some people doing what they thought was the right thing?
Let’s look at an example of each:
Greed: John is a successful mortgage broker. A customer comes in and wants to buy a house and says they can afford to pay $1500 a month for a mortgage. John convinces him he can afford $2000 but puts him at a much higher interest rate because the customer doesn’t know better. John also faked loan documents for another customer so the buyers of his mortgage will think she’s going to pay the mortgage back. John makes a bunch of money this way.
Stupid: Lois previously worked in the finance department at a car dealer. Due to surging housing demand she was hired by a mortgage company to help lend to anxious buyers. She helps customers realize the American dream by getting just a little more home than they can afford. The payments are lower because the rate is fixed today and adjustable in a few years. She doesn’t know she’s slowly helping to temporarily inflate housing demand and prices for people who won’t be able to afford payments when the interest rate resets. She thinks they’ll be able to, or at least able to sell the home or refinance.
Means Well: Frank runs a mortgage company that he only now realized has fallen on hard times. He employs 8 people who love him dearly because he’s a generous person. Frank mortgages his house to help the company get through a rough patch and save their jobs, but it doesn’t last. He asks his employees and some friends in the industry to falsify a few loans on fake properties to help get by. It’s still not enough and the FBI tracks them down sending Frank to jail.
Ethics is a weird thing. We like to think that we would always do the right thing but new studies are showing that when our brain is primed to think in terms of business we’re more likely to commit fraud. And it doesn’t matter what your ethics are in normal environments, people of all types tend to make more poor decisions when business is involved.
This of course doesn’t work as an excuse for the behavior. Just part of the explanation. To me, it’s almost sad that we tend to make less ethical decisions when business is involved. But that just reiterates how important it is to have an ethical culture at your company. If you put ethics first, then you help keep everyone in line. If the company is going to fail, at least it will in an ethical way without taking anyone else with it.