us mortgage providers outsourcing

Oct 5th 2006 | DELHI
From The Economist print edition

India moves in on the West’s mortgages

SOMEBODY’S misfortune is often another’s big chance. Rising interest rates and shaky property prices have made life harder for homeowners and mortgage lenders in America and elsewhere. Many mortgage providers are responding by outsourcing processing work to specialist firms. According to NelsonHall, a consultancy, the total annual value of such outsourcing contracts around the world is about $10.9 billion, with about a third of that in America alone. As yet, only a small proportion is being sent offshore. But as costs mount, says Sunil Mehta of NASSCOM, the Indian outsourcing industry’s lobby, mortgages are “ripe for offshoring”.

It has also, he says, reached an “inflection point”. India in particular is poised to benefit from a huge rise in “mortgage-process outsourcing” in the next few years—worth anything from $100m-150m a year to $3 billion-7 billion. Big lenders are now using their own “captive” operations in India for many mortgage processes, and independent “third-party” business-process outsourcing firms are also on the hunt for work.

One force driving this, as usual, is cost. Higher interest rates eat away at the money-spinning business of refinancing outstanding mortgages, slash business volumes and squeeze margins. So the attractions of a low-cost destination, such as India, increase. Mortgages, moreover, involve a whole range of processes ripe for outsourcing. At “origination”, they might include telemarketing, data entry and document verification. “Servicing” a mortgage can be performed remotely. So, to some extent, can managing defaults and “securitising” mortgages by aggregating them and dicing them into tradable instruments. Victor Martinez-Angles, of Genpact, India’s biggest independent outsourcing firm and once an arm of General Electric, estimates that 50-80% of mortgage-related work can be done offshore.

In August Genpact became the latest Indian firm to acquire an American “front office” when it completed the purchase of MoneyLine Lending Services, an American mortgage-service firm. The savings in using Indian firms can be huge. Mr Martinez-Angles reckons Genpact can make savings of 30-40% for each mortgage loan compared with an American bank. But Andy Efstathiou, of NelsonHall, says that the main impulse behind outsourcing in the industry as a whole is not so much cost-cutting as shifting from a fixed cost base to a variable one: the contracts give companies more flexibility to scale up and down as volumes vary.

Like all outsourcing to India, however, mortgage-servicing is vulnerable to protectionism, justified by fears about data security, such as those aired in a British television “sting” operation this week in which Indian call-centre workers were caught extracting confidential information from customers and selling it. NASSCOM remains confident that India’s record on this is as good as anywhere’s, though Mr Mehta says one attraction of the mortgage business for India is the potential for its firms to diversify away from “voice-based” work—ie, call centres. Expanding operations in the West, through acquisition or otherwise, recognises the limits of “offshoring”. Some mortgage services—such as advising nervous customers on the biggest financial deal of their lives—might actually be better performed at home, or even face-to-face, than down a telephone line from India.

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