Mortgage Offshoring Exploded in ’05

TowerGroup’s report, IT Services and BPO Offshoring to India: From Leading-Edge Strategy to Mainstream Activity, analyzed the factors contributing to the growth of offshore outsourcing and issues surrounding such activity.

While many lenders of all sizes are still unsure whether, when, and how to initiate or expand offshoring operations, and others have chosen not to and have instead set up support operations in low-cost areas domestically, 15 of the top 20 U.S. mortgage lenders had captive (owned) or business process outsourcing operations offshore as of December 2005, according to the report, authored by research director Craig Focardi.

But that number is still too low, according to TowerGroup, as it believes every top-tier lender, particularly those ranking in the top 40 or originating over $7.5 billion in new volume, needs to develop an offshore strategy to grow or to maintain their competitive position over the long term.

ABN AMRO reportedly leads amongst top U.S. mortgage lenders with offshore operations in India, followed by Ameriquest, Bank of America, Countrywide Financial, Chase Home Finance, CitiMortgage Inc., GMAC Mortgage and GMAC-RFC, and HSBC.

The report notes offshoring has generated negativity nationally due to job losses it creates. Washington Mutual, for example, has made several announcements of mortgage job layoffs that are part of its cost-reducing plan to grow offshore full-time employees from 1,600 to 6,000 over the next two years.

Focardi says the offshoring of information-based financial services “is simply a continuation of manufacturing-based global sourcing that has existed for centuries,” only recently there is controversy because it means loss of white-collar jobs domestically, whereas previous outsourcing-related job loss was concentrated in the blue-collar manufacturing sector.

“The mortgage lending industry has always had more volatile employment due to rising interest rates and declining loan demand than due to offshoring,” Focardi wrote. “The number of jobs lost to offshoring is far lower than the number of jobs lost because of mortgage interest rate cycles.”

Historical data shows lenders’ cost metrics worsen considerably when there is a decline in loan volume, which this year is expected to drop 19% from last year, and many who forecasted market-share increases, “can’t reduce high overhead quickly when demand declines because it takes time to restructure people, processes, and locations to fit the lower level of demand,” Focardi explained.

“In this lackluster business environment, lenders have increased their focus on technology and business process reengineering that improves operational efficiency and lowers unit costs,” he added. “The decline in loan volume, productivity, and profitability also means that IT spending budgets grow more slowly or decline,” and because information technology demand does not fall commensurately with declining budgets, “innovative chief information officers are increasingly looking offshore as a way to do more with the same budget.”

In addition to cost savings, lenders sometimes send work offshore if programmers with specific IT skills are not available in their vicinity to complete mission-critical projects within short time frames, according to the report.

The number of mortgage-focused offshore firms in India exploded in 2005, growing to 18 business process outsourcing providers and 10 IT service vendors, and “offshoring has become more attractive in 2006 to satisfy shareholders’ demands that corporations cut costs and improve margins,” according to TowerGroup.

“India not only has a large supply of professionals with degrees in business, computer programming, and engineering but also has a growing army of experienced mortgage professionals,” TowerGroup said, adding that it believes many of them have sufficient knowledge and skills to eventually merit the Mortgage Banker Association’s highest designation, certified mortgage banker.

The report indicates more lenders will also look offshore for knowledge process outsourcing, a specialized type of business processing outsourcing that includes back-office analytics, research, and reporting, as this and other forms of vertical BPO that signal a more sophisticated value proposition for outsourcing are growing at an accelerated pace.

And while the security of information is another issue that surrounds offshoring, TowerGroup said it found that security standards for data centers in India are at least as good as and often better than those domestically, and that information security standards for employees and work areas typically exceed those of many domestic operations.

TowerGroup advised lenders to develop an offshore strategy and evaluate the captive, joint venture, or business process outsourcing operating models. The captive offshoring model is more viable for larger lenders but use of vendors was also recommended. For midsize lenders, TowerGroup recommended either outsourcing to or forming joint ventures with a business process outsourcing provider.