Out of towners

Shipping servicing work overseas comes with a great deal of risk

Last year, it happened when Ocwen executives were giving investors a conference call. And HousingWire was on the line.

During the call, which covered recent earnings and strategic vision, an Ocwen executive began to discuss outsourcing and how it works well for his firm. To paraphrase, he said: “We would put a call center on the moon if we could.”

While the quote may not match precisely what investors were told or heard, the basic message was loud and clear: Call centers abroad can and do function at mortgage finance firms.

When Ocwen acquired HomeEq in 2010, two offices — one in Sacramento, Calif., and one in Raleigh, N.C. — with about 1,000 American workers were cleaned out over the course of the year. Ocwen did not rehire. In fact, the servicing giant merely rerouted the calls those offices received overseas.

Around the time Ocwen provided the investor call in September 2012, just 853 of its more than 5,000 employ­ees lived in the U.S. The rest were in India and Uruguay.

The offshoring practice is so widespread — and, crucially, under the radar — that many may not even know the full extent of its influence in the space.

Law firms often outsource foreclosure paperwork to certi­fied attorney-assistants overseas.

One such firm, which HousingWire won’t name to respect it’s fear of headline risk, said its associates in the Central American nation of Panama provide much better services than when they handled those tasks in the U.S. Midwest.

“Over there, it’s a job to be proud of,” a former partner at the firm told HousingWire.

“They wear suits and ties to work and really think they are part of an important task, legally removing distressed borrowers from their properties. They are so careful not to do anything wrong; they only want to get it right.”

Not so back home. “In the United States, such a role is considered, for obvious reasons, a terrible job,” he added.

The headline risk the law firm is concerned about is very, very real.

Bank of America recently admitted it would start to pro­vide appraisals from a base in Bangalore, India, in a bid to rebuild its share in the U.S. mortgage finance space while shaving costs.

According to Bloomberg, Goldman Sachs also planned to provide 4,000 jobs in India. Considering Bank of America is rumored to be planning to shutter a Plano, Texas-based appraisal company, the big bank took a much bigger hit on Twitter.

From June 28 to July 8, real estate agents flooded social media platforms to call for an end to doing business with Bank of America.

The too-big-to-fail did not respond, appearing to absorb the bad news as it tends to do with just about every other negative headline about its mortgage operations.

For smaller firms, there may not be that kind of luxury.


The process of offshoring operations to India, China and other emerging markets is not the least bit novel, nor is it exclusive to the mortgage servicing industry.

In fact, it’s been happening for some years, bringing both benefits and obstacles to any financial firm willing to set up shop overseas.

On the upside, offshoring creates labor market efficien­cies by reducing overhead expenses and allowing firms in highly regulated environments to tap into emerging mar­kets with lower-wage requirements for operators.

On the flip side, however, both borrowers and companies face the risk of communication barriers and the deep-seated resentments that often accompany decisions to ship work overseas. The situation becomes especially sensitive when the work involves centers dealing with issues as sensitive as mortgage servicing.

But there’s another headwind tipping the scales, prompt­ing more servicers to look outside the U.S.: namely, the fact that these firms remain on regulatory radar screens, facing scrutiny over single-point of contact requirements and other servicing guidelines unleashed over the past few years.

Last year, U.S.-based ratings firms highlighted some of the risks inherent in offshoring servicing work.

One of their top concerns: those often-burdensome com­munication barriers that exist between servicing employ­ees working overseas and struggling U.S. borrowers.

Even with a script, a customer service representative in India does not have the same frame of reference or local knowledge as a U.S.-based call handler might — never mind an actual borrower on the other end of the line. Think of the well-known film from 2008, “Slumdog Millionaire.”

The popular movie includes a scene that takes place inside a customer call center in India, depicting commu­nication difficulties on the part of both the caller and the customer service representative. The female caller from the U.K., bearing a broad regional accent, is attempting to get information and pushes the employee off-script — an awk­ward moment that resulted in the customer hanging up. It may be fictional, but it’s not difficult to imagine a similar exchange between a U.S. mortgage customer and a foreign-based call handler.

Yet, though a communication breakdown can seem like a simple obstacle, Diane Pendley, managing director of the operational risk group for Fitch Ratings, began firing off warning shots about offshoring risks last October.

“I have personally listened to an extensive number of calls from overseas,” Pendley said at the time.

“I have a very strong opinion about it not working as well, and you have to be careful,” she said, adding, “These ser­vicers are working to put their best foot forward.”

The opinions of Fitch analysts have not changed that much since.

Any type of offshoring that involves a customer-facing function comes with inherent risk, analysts claim.

Some companies believe in offshoring functions like customer service, collections and loss mitigation, while others don’t, says Thomas Crowe, senior director in the operational risk group at Fitch Ratings.

Crowe acknowledges back-office functions have been moving overseas for years. But servicing calls are an entirely different story.

“We’ve seen over the years [that] some servicers have tried to move that function offshore and realized it wasn’t working and brought it back onshore,” Crowe told HousingWire.

In some cases, those servicers were using overseas vendors, which made it difficult to oversee and control the process, leading to frustrations, risk and the eventual return of some companies to the U.S. Yet, other financial firms have stuck with the model.

If a company is going to offshore, “a captive subsidiary model is best,” suggests Richard Koch, senior servicer analyst with Morningstar Credit Ratings.

Generally servicers and mortgage firms have two options: a captive subsidiary that is part of the parent company and is forced to follow all of the parent firm’s regulatory procedures and compliance initiatives. The other: a third-party vendor, which inherently comes with more risk since the main company in this situation has less control or oversight of the work performed overseas, Koch explained.

To be sure, cases can be made both for and against offshoring. Both viewpoints have gained traction along with strong backing vocals. Pendley, perhaps not surprisingly, has been one of the loudest skeptics thus far.

Last October, she asserted that the quality of servicing calls performed outside the U.S. do not match the quality of discussions occurring with borrowers when the servicing contact is U.S.-based.

August towners 2VEERING OFF SCRIPT

The issue, Pendley said, is overseas call center employees are often operating strictly on-script, which is acceptable when a call comes with few deviations from the norm.

But conversations often veer substantially off-script, and overseas representatives may face barriers when trying to deal with unplanned situations.

“Every call that I have listened to from overseas, I felt was not of the quality that you could get in the U.S.,” Pendley said in October during a HousingWire conference.

Her opinions were echoed by Thomas Crowe at Fitch. Crowe remembers one instance in which a borrower was talking to a loss mitigation representative overseas, and the employee offered a prepayment plan beyond the borrower’s ability to pay. The call became tense when the overseas employee came back with another payment offer — one that was even higher than the initial offer.

“It was a very awkward conversation, where you could just see the communication was not working,” Crowe told HousingWire. Perhaps “Slumdog Millionaire” is not so far off-base, then.

Yet Morningstar’s Koch — who also listens to numerous servicing calls — believes it can work. But he says the calls have to be well scripted and the training has to be of a high quality. One key problem: The turnover of staff overseas can make it difficult to train employees and keep them in their jobs for long periods of time.

A company that effectively offshores servicing generally is one that has spent time and money on studying the psychological components of the call and the communications involved. They also spend money on training employees.

Koch says those that are successful tend to “have their employees go through extensive training — including a month-long series of classroom discussions.”

He adds, “They learn about the U.S. mortgage system, the HAMP program … they learn about how workouts are done.”

Those who succeed also make sure their employees know how to be empathetic and knowledgeable, so the scripting of the call is not off-putting to the distressed caller on the other end, Koch noted.

So offshoring would appear to be neither entirely disfavored nor favored. Indeed, it does have some clear benefits — the most poignant being the cost savings that come with sending work overseas.

“I have been hearing about more servicers looking into offshoring because there is an increase in regulations,” said Koch, who linked this desire to rising servicing costs in today’s intensive regulatory environment.

“That cost is becoming ever more burdensome for them in the U.S., so they are considering offshoring,” he explained.

Crowe added, “We don’t necessarily think it is bad or wrong — there is certainly a cost savings, and with the back-office functions, it is something that has been going on for a long time.”

However, he noted, “When you get in the area of customer-facing functions, it becomes more questionable whether it’s best for the borrower, the investor or for the bottom line.”

He notes that investors — who in the past saw loans tied to their investment pools sent overseas for servicing at foreign call centers — have expressed some reservations about the process.


All of this leads to the lingering question: Is offshoring the best solution for mortgage firms, especially servicers?

If you’re Phil Huff, CEO of collateral valuation and risk assessment firm Platinum Data Solutions, mortgage firms may be jumping the gun in going overseas to improve costs when investing in improved technology is a means to the same end.

He’s no stranger to the trend, often noticing how many companies already offshore to India — or even Eastern Canada.

One area of focus is the appraisal review side of the market. It’s one area where Huff sees real risk when sending the work offshore.

He points to a lack of local knowledge among overseas workers as a cornerstone problem. And he views an eminently less controversial solution on the doorsteps of U.S. companies: The fact, Huff says, that the firms can focus on improving tech solutions, rather than simply moving work to another country.

Huff believes companies that want to conduct appraisal reviews could create as much cost efficiency by automating certain work, allowing new technology to build the systems needed to meet today’s market demands.

Huff said the majority of today’s appraisal reviews are still done manually. The solution is to automate that process to cut costs, he explained.

As for moving more appraisal reviews overseas, Huff says: “I don’t think the movement has legs quite honestly. There are many things that are suited for offshoring.” Appraisal reviews do not figure among them, he insists.

Instead, Huff believes tech solutions will cut out redundancies, using data to drill down details while offering the accurate and cost-effective appraisal reviews that firms desire.

“I think in five years you are going to see more technology used and less offshoring,” Huff added. “I still think there is a lack of awareness about how these [tech solutions] can be used and deployed.”

But it boils down to how companies handle offshoring decisions, the analysts note.

When mortgage servicers began gobbling up mortgage servicing rights in 2012, Fitch Ratings said larger players with customer interfacing-functions should ensure their new volumes do not become too heavy for the overseas offices to handle.

In a report, the ratings agency conceded that when done correctly, offshoring is cost-effective.

But an example of an unbalanced platform would be a situation where 80% of a firm’s mortgage servicing is overseas and only 20% of its workforce is located in the U.S., the firm’s Pendley warned last year.

This creates an imbalanced staff situation since it makes it more difficult for U.S. operations to take over work when necessary — or in times of exigency.

For companies that choose to take the plunge, as analysts like Koch of Morningstar noted, training and oversight of foreign subsidiaries are absolute necessities.

The harsh reality is the mortgage industry — like so many others — exists in a rapidly globalizing society. Yet the servicing function itself remains too personal to handle with remote detachment. It can be done, it would seem, but with a concerted effort and training to make certain operations are carried out with a great degree of propriety.

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