01 May 2012

Freddie and Fannie Losing Their Brightest Stars

Story first appeared in The Wall Street Journal.

Concerns are growing about departures at mortgage-finance giants Fannie Mae and Freddie Mac, a situation that some executives argue is making it difficult to manage the companies and their $5 trillion mortgage business.

The latest sign came Monday when Freddie said that the executive who oversees the single-family mortgage business, by far the company's largest and most complex division—would leave this month to take another job in the industry.

The executive, who has spent two years at Freddie, joins a growing list of industry veterans who have departed over the past year. The chief executives of both Fannie and Freddie have said they plan to leave this year. In the past two years, dozens of senior managers, many with long tenures, have left.

Worries over compensation and low morale are playing a role in prompting Fannie and Freddie employees to look elsewhere. Freddie last month revamped the way it pays its employees amid concerns that Congress might sharply cut pay for rank-and-file workers at the companies, after scrapping bonuses for senior executives.

Freddie warned of disruptive levels of turnover at both the executive and employee levels when it reported its 2011 financial results in March, and it warned that could lead to breakdowns in many of the company's operations.

The exodus of top talent began shortly after Fannie and Freddie were taken over by the government in 2008 through a process known as conservatorship. With the job market in the Washington area improving for the financial-services sector, the departures are becoming more frequent and potentially destabilizing.

Congress last fall threatened to put Fannie and Freddie employees on government wage scales, which would likely represent a big drop for many mid- to senior-level managers. Critics in Congress have said employees shouldn't reap big paydays now that their operations have been effectively nationalized. These companies are owned by taxpayers and their staff should be paid accordingly.

The firms also face conflicting objectives to limit losses while accepting more risks to help stabilize housing markets, and the competing mandates have made them a target of criticism.

If you have a company in decline, your best talent will go out the door first. Rapid turnover at companies with such huge financial responsibilities can expose the taxpayer to even more risk.

The companies' brands are toxic. Many employees say they often take pains to avoid telling people where they work, and swap stories about being met with hostility at Little League baseball games or social gatherings when people learn who their employers are.

Freddie saw its voluntary-turnover rate rise to about 13% in the first six months of 2011, up from 8.5% on average over the previous five years, according to the firms' federal regulator. Fannie's rose to around 11% after averaging slightly above 6% over the preceding three years.

Lawmakers and others in Washington don't understand the vulnerability that comes from this company operating in conservatorship for almost four years. As time passes without steps toward a resolution, the operational quality of this company is further at risk and goes down.

Employees at Freddie felt particularly vulnerable because over the past decade the company adopted pay programs that tied compensation to job performance. The company's new pay structure replaces the annual performance-based pay component with a fixed salary.

Departures accelerated when it appeared that the company might not be allowed to fund any of the performance-based pay. We would have much, much greater turnover if we weren't able to offer these people certainty.

Under the changes, more senior employees who generally stood to earn more than 15% of their annual pay as a bonus would end up with higher annual guaranteed salaries, but with lower potential compensation. Those employees would also have a greater share of pay that is deferred, though they won't have to stay at the company to receive the deferred pay.

The changes followed a related revamp, announced in March, for the top 70 employees of Fannie and Freddie. Fannie has a different pay structure and didn't need to make similar changes, according to a company spokesman.

Rising departures in some ways reflect the changing DNA of the government-run companies. Fannie and Freddie used to be very dynamic organizations that were leaders of the industry. Now, they're being treated like wards of the state. It's discouraging for very professional, top-of-their-class individuals to find themselves having to ask for permission to do pretty much anything.

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