Offshoring to save big bucks for U.S. lenders

NEW YORK: U.S. mortgage lenders will achieve moderate cost savings if they decide to move some of their operations to cheaper overseas locations like India, according to an industry study released on Monday.

The U.S. mortgage industry, benefiting from still low rates and a housing boom, could achieve a 6 percent cost reduction per new loan by 2008 if it relocates some operations overseas, said TowerGroup, a Needham, Massachusetts-based consultant firm.

However, savings on loan servicing are expected to average about 10 percent by 2008, said Craig Focardi, a senior TowerGroup analyst who authored the study.

That is a far cry from the 20 percent to 50 percent savings touted by proponents of offshoring, according to TowerGroup.

These huge savings could happen for some aspects of mortgage lending and servicing. These hefty figures likely assume that lenders would offshore all of their operations, the firm said.

"Further, no matter what offshoring model they use, return on investment and cost savings estimates must include a careful assessment of start-up investments, new marginal costs necessitated by the offshoring initiative, and overhead," said Focardi.

On loan origination, lenders could offshore data entry, document and data verification and quality control, according the TowerGroup study.

On the servicing side, lenders could offer basic customer support and collections from overseas centers.

Meanwhile, management at mortgage lending companies has an obligation to shareholders to examine all cost-costing moves, not only offshoring, TowerGroup said.

"Before jumping in headlong, institutions should consider the full spectrum of cost-reduction strategies available to them," Focardi said.

Some of the largest lenders in the United States, such as Bank of America, Citibank and Countrywide Financial Corp., have planned or have already established overseas mortgage operations, according to Focardi.

These companies have optimized their cost-savings by improving their domestic operations as well as offshoring, he said.

"Offshoring will have a positive impact," Focardi said. "Offshoring is not a panacea for inefficient onshoring operations," he added.