Offshoring will help U.S. Mortgage Lenders Lower Total Origination Costs per Loan 6% by 2008: TowerGroup

TowerGroup Finds Higher Percentage Savings for Individual Loan Processes, But Cautions Lenders to Evaluate Offshoring Alongside All Cost Reduction Alternatives

NEEDHAM, MA, August 23, 2004 � Outsourcing in India has become a political football, making it difficult for mortgage firms and their IT providers to distinguish offshore myth from reality. New research from TowerGroup predicts tangible savings for lenders offshoring portions of their loan origination or servicing processes. In addition, the research seeks to clarify claims linking offshoring to double-digit percentage cost reductions.

�The offshoring and outsourcing business models in India are still maturing, but will help the US mortgage industry lower total origination costs per loan 6% by 2008,� said Craig Focardi, senior analyst in the Consumer Lending & Bank Cards practice at TowerGroup and author of the research. �The hype regarding 25-50% 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. 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.�

Highlights of the research 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 25-50% 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% by 2008 � and will ultimately reduce total direct loan origination and loan servicing costs by 2% to 4% 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. Before jumping in headlong, institutions should consider the full spectrum of cost-reduction strategies available to them,� Focardi said

Two TowerGroup research reports � �Passage to India: IT and Business Strategies for Mortgage Lending Offshoring and Outsourcing in India� and �Offshoring in India: The New Driver for Lower Mortgage Operating Costs and Increased Competitive Advantage� � are available. Those interested in purchasing a copy of either report may contact TowerGroup at +1.781.292.5200 or [email protected].

About TowerGroup: TowerGroup is the leading advisory research and consulting firm focused on the global financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s largest financial services, technology and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in New York, London, and Kuala Lumpur, TowerGroup serves a global client base.