Tuesday, July 14, 2009

Trust and Workout Negotiations

Two consecutive posts on trust showed up in my Google Reader (Trust, by Jonah Lehrer on Frontal Cortex, and A Matter of Trust, by Randy Pennington on the Sales and Sales Management Blog), which led me to think about the lack of trust inherent in most workout negotiations.

First, is trust a necessary condition to do a loan workout? No – people who don’t trust each other can reach an agreement. However, it is much easier to reach an agreement when one or both sides are not scrutinizing every detail of the transaction. And, if you don’t trust the counterparty, every potential circumstance down the road needs to be considered and addressed. Given the uncertainties in the real estate market that’s almost impossible to do, with the result that no agreement is reached.

Here are Pennington’s elements of trust and how they relate to real estate workouts:

Character: Every discussion of trust begins here. Character defines an individual’s approach for dealing with themselves and others. It is the demonstration of the values adopted for basic living. Individuals who embody basic principles such as honesty, trustworthiness, loyalty, justice, patience, and duty find that their ideas and recommendations are readily accepted. The nagging question of motive lingers when character is in question.

To know someone’s character requires you have a prior relationship with them. Sometimes borrowers and the people on the lender side of a workout know each other; much more often, they do not. Even when the borrower and the lender personnel have a relationship, there’s a good chance it has been a fair weather relationship. When formerly amicable relationships are tested by difficult circumstances, both sides often perceive the other as betraying the relationship.

Competence: How good are you at your job? How much do you know about your product? Can you answer my questions with confidence and authority? Professionals who earn my trust are competent. They recognize their individual strengths and weaknesses and commit to continuous growth in all areas of individual performance. An excellent reputation for honesty will be rendered useless if it is matched with incompetence.

Again, if you don’t have a track record with someone it’s hard to assess their competence, and in a workout situation there is generally plenty of doubt about the other party’s ability. From the lender’s perspective, the presumption is often the borrower’s incompetence has contributed to the current situation. On the lender side, workout people rarely have time to study the deal, and have very high caseloads leading to a lack of responsiveness. From the borrower’s point of view, this lack of familiarity and apparent indifference can easily translate into a conclusion the workout person is incompetent. 

Communication: Outstanding presentation skills contribute to effective communication. Unfortunately, too much emphasis has been placed on the importance of the pitch. Communication that builds trust is about listening. The ability to understand others creates a bond that encourages interdependence and enhances commitment. We tend to trust those who appreciate our goals, struggles, joys and situation.

There is usually surprisingly little actual communication between the borrower and the lender during a workout discussion. The borrower sends in a proposal, the lender reviews it and responds, and either an agreement is reached or negotiations break down. Face to face meetings are rare, and it’s pretty unusual for there to be more than two or three conversations of any length. Usually the communication constraint is on the lender’s side; workload considerations restrict how much time is spent talking about a deal.

Also, even when there is communication it often destroys trust instead of creating it. Many borrowers and lenders think posturing is an integral part of negotiating, and that it’s to their advantage to take a hard line. Sometimes that’s true, but more often it just makes it more difficult to reach an agreement.

Consistency: The sales professional that sold me my first car from Sewell impressed me with his competence and communication. That, combined with the company’s reputation for character, led to the initial buy decision. Purchases two through nine have been made because of consistency. Every person at every level has continued to perform in a manner that re-earns and maintains my trust. Confidence that your performance will be in line with past experience frees others from worry about protecting themselves from an unpredictable response. 

Verifying consistency requires multiple transactions. Workouts are usually one-off affairs, so neither party establishes a track record with the other. Given the opportunity I like to try to break my workouts into some incremental steps to establish some trust (for example, “You send in a payment while I get an updated appraisal, I will hold off from filing the foreclosure”). The more usual “dual track” approach (“I’ll file the foreclosure so I don’t lose any time and we’ll see if something can be worked out before the sale date”) is the antitheses approach.

Courage: Earning and maintaining trust in an increasingly competitive and demanding world requires courage. Challenges must be confronted head-on in a manner that respects diversity; demonstrates professional business practices; and maintains personal integrity. True courage requires commitment and the willingness to accept personal risk. It fosters admiration and sets in motion a series of events that influence long-term success.

Neither side in a workout is typically up for taking much additional personal risk. The borrower has generally already experienced substantial losses and has exhausted his or her resources. On the lender side, it is much easier to look back and see the time and value lost when a workout attempt fails, and much harder to identify what might have been gained by a successful workout.

Considering the obstacles, it’s not surprising few deals are worked out.