Offshoring and outsourcing will help the U.S. mortgage industry lower total origination costs per loan by 6 percent by 2008, according to new research from the TowerGroup.

“The hype regarding 25 to 50 percent offshore cost savings may be true for individual subprocesses. But it ignores the fact that lenders will neither offshore their entire loan origination or servicing process, nor offshore their entire book of business,” said Craig Focardi, TowerGroup senior analyst and author of the research. “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.”

Some of the research’s highlights include:

  • Mortgage firms will not perform true end-to-end loan processing in India. In the loan origination process, firms will offshore data entry, document and data verification, and quality control.  In the loan servicing process, firms will offshore basic customer support and collections.

  • Although lenders may save 25 to 50 percent by offshoring individual lending processes, the creation of new facilities, additional overhead costs, and offshoring of only a percentage of loan processing will limit total average savings to far less.

  • TowerGroup believes that offshoring and offshore outsourcing in India and other countries will help the US mortgage lending industry on average lower total origination costs per loan 6 percent by 2008, and will ultimately reduce total direct loan origination and loan servicing costs by 2 to 4 percent by 2010.

  • Management at financial institutions has an obligation to shareholders and stakeholders to look at any process, business model or technology that lowers costs and increases investor return and customer satisfaction. TowerGroup believes offshoring should be near the top of the list, but must also be examined in the context of other alternatives including nearshoring, business process reengineering and domestic call center relocation.

“Offshoring in India or in any other developing region of the world is a strategic business decision, not a tactical operating cost decision, because it requires large, long-term capital and management resources,” Focardi said. “Before jumping in headlong, institutions should consider the full spectrum of cost-reduction strategies available to them.”


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