US Mortgage industry slump forces firms to offshore

BANGALORE: Mortgage lending companies in the US, are looking at the India offshoring option to offset the current dip in mortgage financing market.

Average interest rates on mortgages have been rising over the last few quarters. Historically low mortgage rates that were prevalent during the end of the last decade led to a five-year housing boom. There is, however, a market reversal now with high interest rates deterring borrowers.

According to US Mortgage Bankers Association (MBA) figures, the refinance market, which stood at 74 per cent in Q4 of 2002, stumbled to a low of 45 per cent in Q4 2005.

MBA also projects (as of March 2006) that residential mortgage lending volume in 2006 will drop by 19 per cent from last year.

A Tower Report on the mortgage industry states: “In this lackluster business environment, lenders have increased their focus on technology and business process reengineering that improves operational efficiency and lowers unit costs. The decline in loan volume, productivity, and profitability also means that IT spending budgets grow more slowly or decline.”

Effects of the slump are slowly becoming evident. Last week, Ameriquest Mortgage Co announced that it would close all 229 of its retail branches and lay off 3,800 people after a steep decline in its lending volume. The company's loan volume plummeted 46 percent to $2.6 billion in Q1 this year, from $4.8 billion a year earlier.

The decline is forcing the mortgage bankers to look at ways of managing fixed costs and build efficiencies in their operations. These hard-hit companies are not looking at just the top IT services vendors but also specialized and mid-tier companies like Tavant Technologies and iGate Global Solutions.

The TowerGroup suggests that any US mortgage lender among the top 40 (originating more than $7.5 billion in new loan volume) needs a global sourcing strategy. Data privacy and security is no longer a serious concern.

“They are very aggressively pursuing global options to run their operations which help them with better cost structures, reduced response time to market and certainly efficiencies,” said Sanjay Prakash, director (Practice), Tavant Technologies.

According to Srinivas Vijayaraghavan, associate vice president, iGate Global Solutions, the industry has been traditionally low-tech and paper-intensive.

“Technology adoption has been slow compared to industry segment like manufacturing. It takes around 42 days to convert an application into a loan. It is only now that they are trying out a supply chain approach to mortgaging.”

Leading firms like Bank of America, Chase Home Finance and others have already gone offshore-either through captive operations or with an Indian partner. So far, most have been outsourcing back office processes such as help desk, document verification and managed services to Indian companies like Daksh (IBM), Nirvana Business Solutions, Cognizant, e4e and Ocwen. But now the market scenario is forcing them to outsource other processes as well.

“On the IT side of things, the changed market scenario has put an increasing emphasis on improving processes and thereby reducing costs. Increasingly IT outsourcing is proving to be the cost differentiator for all the mortgage companies,” said Prakash of Tavant.

Tavant has seen a three-fold increase in its revenues over the last three years thanks to its solutions for the mortgage space. The company counts six mortgage-lending firms among its clientele. The third party option seems more attractive than captives since the firms are limited by budgets. “We have plug `n play ready components and a dedicated focus which is an advantage for the companies, which cannot do offshore operations themselves,” said Prakash.

He feels that clients are looking for deep partnerships with offshore solution vendors. Besides big mortgage players, mid-sized companies are also looking to stand their ground and get more competitive in a market segment that is witnessing consolidation.

“The mid-tier companies are getting aggressive and upgrading their systems and processes to stay competitive,” said Prakash.

TowerGroup recently stated in its March report that that security standards for data centers in India are at least as good as those at US domestic data centers and often better. The report further says that the mortgage lending industry has always had more volatile employment due to rising interest rates and declining loan demand than due to offshoring.