Flood, earthquake, lead paint and country of origin. Can you imagine preparing a disclosure document covering where the paperwork for a loan was processed? Imagine if mortgages were “manufactured” in India. Would we disclose that the HUD-1 and the post-close documentation clean up were handled in India? Would we add a label that says, “This mortgage was assembled from foreign and domestic components” or simply, “Mortgage Made in India,” just like the labels that say “Made in China?”
When you first go to India, the notion that American lenders will handle financial paperwork and call center services from Bangalore or Bombay seems improbable. Yes, modern telecommunications can put an IP phone on a desk anywhere, and the Indians do speak English. But it is not as easy to understand as a Boston accent (Note: beware author is from Boston). Sure, there are power outages on most days, but the backup power kicks in seamlessly. And when I am eating lunch in Boston, it’s midnight in Delhi. But mortgages are all about bureaucracy, regulations, compliance and details, and this former British colony knows all about bureaucracy, perhaps better than any in the world.
Most of the top U.S. lenders already depend on India for software development. Most have call centers or “BPO” (“business process outsourcing,” not “broker price opinion”) operations there. GE Capital, Citigroup, Chase, ABN AMRO and Countrywide are all in India.
Daily life in a major Indian city has scenes of the most modern technology, and yet lives that have not changed in 200 years. A shrunken old lady veiled in a pedal cab sends an SMS text message on her mobile phone while an elephant with an advertising banner walks by. A new hire at a mortgage processing shop details her resume with American giants Providian, SBC, GE Capital and CitiMortgage.
If you spend a few weeks in a big Indian city (with Delhi at 12 million, are there small cities?) you feel like you are in Silicon Valley during the dot-com craze. It is boom time in the Indian tech sector, and the evidence is everywhere. And while the impediments to successful offshoring are towering, the wage differentials are so powerful that the operational issues will be worked out.
This article is mostly about “importing” mortgage processing, but you should also look out for the reverse opportunity. India has 300 million members of its middle class. This is a huge market for credit, mortgage insurance, credit scoring, employment verification, and secondary market. My wife asks why India would clog its housing market with these complexities of modern lending? “Exporting” this American expertise may seem like revenge for any job losses in the U.S. from offshoring. But the truth is that these American areas of expertise are essential to the growth of any modern housing market.
Moving part of mortgage processing to India is not easy. It’s not a casual decision, and not one that you can reverse easily. But there are two benefits that come from offshoring. The first is cost savings. The second is the managerial and efficiency gains that come when U.S. lenders can narrow their scope, specialize further and shed responsibility for some “core” operations. I believe that 60 percent to 70 percent of the mortgage sector’s non-sales labor can be sent offshore to a lower-cost location. And the savings can be more than 30 percent to 40 percent. Do the math and you’ll find that the mortgage industry can cut labor costs by almost one-quarter.
Rocket science, sneakers and mortgages:
But surely processing mortgages is rocket science? It is complicated. How can origination or servicing be shipped to a country that was receiving CARE packages just 20 years ago? Some parts of mortgage processing are rocket science. Some hedging strategies and perhaps calculation of risk in a FICO score seem like rocket science. And there is little familiarity with consumer credit (mortgages, credit cards) among the Indian outsourcing rank-and-file. My 10-year-old daughter receives credit card solicitations often, and fills them out too (and gets rejected). She has a good understanding of consumer credit. That is not the case in India.
If you break down the mortgage lending process into smaller processes, the front line staff member does not need mortgage expertise. Offshore management needs to see the whole picture, but the associate tracking P&C insurance on your mortgage processor just needs to understand that task. The focus is not the big-picture of offshoring your entire loan servicing operation. Instead the mortgage back office is broken into dozens of tasks like verifying a field from a 1003 application that has been imaged. The skill level is lowered, which requires less mortgage savvy. Is mortgage lending like making sneakers or launching rockets? When you manage it this way, it is like making sneakers. Most lending comprises easy-to-define, repetitive labor-intensive tasks.
What parts of lending can go offshore?
Not all mortgage processes that can be sent offshore should be sent offshore. At Equinox Corp., we analyze which parts of the lending process can be outsourced with our Process Cost Reduction Analysis (PCRA). The PCRA looks at a lender’s business processes to identify where the lender can save money by outsourcing, and which tasks fit an offshore model. All parts of lending operations except for the retail sales process have potential for cost savings. But a cost orientation is just the first cut. Many processes are not suitable for offshoring.
Here’s a quick guide to evaluating a mortgage or real estate process and whether it should be sent offshore: www.stoprunoff.com/PCRA_everywhere.xls. For example, is a task labor-intensive, well defined and stable – it does not change over time? Does the task stand apart from other tasks in the bank? Is live customer contact minimal? If the answer is “yes” then you may be able to specialize the task and cut costs.
Offshoring is a two-way street:
Offshoring software development or processing mortgages is here today. But the more interesting opportunity lies in the future. There are 300 million middle-class Indians hungry for better housing. India needs mortgage insurance, title insurance, P&C insurance, servicing, underwriting and a secondary market. U.S. settlement services vendors already have these sophisticated capabilities. While we can benefit consumers when we buy low-cost foreign goods and services, we stay powerful when we are aggressive in exporting our advanced capabilities. This grows our human capital and helps wages grow at home. So, let’s think global and export our mortgage savvy.
Steve Kropper is senior vice president for Equinox Corp., an iFlexSolutions business. He founded Boston-based Domania, which is now owned by LendingTree. Kropper also teaches in the Mortgage Bankers Association’s School of Mortgage Banking and is a member of MBA’s Residential Loan Production Committee. He can be reached at steve@kropper.com or (617) 306-9312.
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