2007 U.S Mortgage Market - Key Success Factor - Offshore BPO

The 2007 Outlook:

Standard & Poors believes that the 2007 mortgage market in the United States is likely to have lower mortgage originations than 2005/2006. To stay competitive in the lean market coming up ahead, leading mortgagers would need to increase consolidation and accelerate value chain integration, thereby lowering cost of origination and servicing.

Consolidation:

Consolidation is in full swing in the mortgage industry already. For example, a decade ago, the top 5 mortgage originators in the United States handled 17% of the total origination volume. In 2005, the top 5 mortgage originators handled 50% of the total origination volume.

Value Chain Integration:

The large mortgage players such as Countrywide, Wells Fargo, WAMU, JP Morgan Chase and Bank of America lead the market on account of their fully integrated capabilities across the businesses of (a) origination, (b) servicing and (c) funding. These large players leverage their considerable distribution muscle to influence the brokers, correspondent banks, realtors and property developers.

They are therefore ideally positioned to retain their leadership position during the lean days ahead on account of the proactive measures they have taken in consolidation and value chain integration.

How does Consolidation and Value Chain Integration impact Offshore BPO?

When two companies merge, the larger organization which emerges as a result of the consolidation needs to continue to work with disparate legacy systems for the origination and servicing side of the business while they migrate to the chosen long term technology platform. Offshore BPO helps by providing the bridge by having two teams trained on the two systems working till the day the switchover to the chosen platform happens. Citi Mortgage has leveraged this model with considerable success as they acquired mortgage servicers in early part of this decade.

Let us take a closer look at the impact of the 2007 market trends on mortgage originators and servicers on the offshore mortgage BPO opportunity. Please keep in mind that the large mortgage players mentioned above will be impacted on both origination and servicing fronts.

2007 Market Impact on Mortgage Originators:

In the U.S only 20% of mortgagees take their loan from their primary bank! This is likely to change on account of the lower originations and higher interest rates coming up ahead. Banks are likely to:

(a) Sell mortgage loans to their existing customers as they call customer service.
(b) Sell mortgage loans to their existing customer base through marketing campaigns.
(c) Acquire new customers through targeted marketing campaigns.
Mortgage origination leaders typically strive to keep the Cost of Origination within 2% of the Principal Originated. With the Interest Rates staying between 5 and 7% the margin for profits is not much. The past few years have been growth years for the origination business and therefore many mortgagers were able to live with inefficiencies and slower customer responsiveness. In the lean period coming up ahead, the mortgager would be forced to increase efficiencies, customer responsiveness and lower operational costs.

Currently many of them run on home built, disparate systems. They will need to invest in new, integrated, internet friendly technology platforms. For example, the mortgagers would need to invest in robust credit appraisals and under writing systems to ensure fast, effective and lower risk while providing loans.

Offshore BPO value in Mortgage Origination:

Offshore BPO Providers can:

(a) Cross sell mortgage loans to existing customers who call customer service.
(b) Cross sell mortgage loans through outbound telesales programs.
(c) Resolve customer requests quickly through turbo charged back office operations.
(d) Lower origination costs to 2% of the principal originated.
(c) Perform decision making services such as credit appraisals and underwriting.

2007 Market Impact on Mortgage Servicing:

The key to success in servicing is to operate in the most efficient and profitable way while servicing portfolios. Leaders within this segment attempt to keep the costs of servicing within 0.20 % to 0.30 % of Principal Serviced. Mortgagers primarily use customer service centers for mortgagee servicing.

Offshore BPO Value in Mortgage Servicing:

Mortgage Servicing Companies can leverage Offshore BPO operations for services such as:

(a) Loan File Set Up including Welcome Calls.
(b) Account Maintenance including Address and Beneficiary change updates.
(c) Payment Processing including assisting the customer with tax statements, processing of the principal, interest and insurance payments.
(d) Escrow management including escrow account set up, dispute management of escrow shortages and monthly payments.
(e) Foreclosure management including processing of request for statements, lien releases.
(f) Loss Mitigation including early and late stage collections.

In conclusion, Offshore Mortgage BPO could help in (a) Leveraging existing customer relationships and acquire new customers to lower cost of origination (b) Providing effective and efficient customer service to lower cost of servicing (c) Deliver the Brand Promise of Mortgagers.

In simple terms, Offshore BPO can be the key to efficiency and profitability of mortgage servicers in the tough times ahead.

Quite a few years back, when the U.S Real Estate Sector was going through the roof, a few mortgagers made investments in Offshore BPO and Offshore Captive centers. Approximately 8000 professionals work in this segment in India alone. These operations are now mature and ready - for the mortgager who is looking to leap frog the lean period ahead.

Cheers

Paul Simon Arakkal