And “BPO Opportunities in the U.S. Residential Mortgage Market,” produced by Trinity Partners, Tucson, Ariz., and Avendus Advisors, Mumbai, India, estimates that the outsourcing potential by mortgage companies has barely been tapped. The report says the offshore addressable BPO market size for the US residential mortgage ecosystem is in the range of $6 - $7.4 billion. The existing mortgage processing BPO market in India is nearly $150 million, employing 7,500.

"We believe that the future growth of BPO will be driven by an increased focus on domain-specific, vertical processes that provide not only cost savings, but other long-term benefits in the areas of productivity and capacity management for the client," said Francesco Paola, Trinity's vice president of sales and marketing.

The report states that offshore-based outsourcing is expected to generate cost savings in the range of 30-50 percent along with other long-term strategic benefits, such as enhanced productivity and reduced cycle times leading to more efficient operations and competitively positioned organizations that will manage capacity in line with market fluctuations via an extended offshore back-office.

"Increasing competition in the BPO market is forcing BPO providers to deliver more and more value to their clients each day,” said Pijush Sinha, vice president with Avendus Advisors. “In order to maintain market share and thought leadership, providers must look toward delivering higher value processes for their customers."

The report would appear to support other research confirming growth in outsourcing. Last year’s PricewaterhouseCoopers’ Management Barometer Survey showed that outsourcing or shared services is now being used by 75 percent of U.S. and European multinational companies to support their financial functions and will continue to do so over the net 12-24 months.

At the Mortgage Bankers Association’s National Technology in Mortgage Banking Conference in March, Prashant Kothari, president of String Information Services, Washington, D.C., said from a business standpoint, the decision to offshore is simple: “keep the best, make it better and outsource the rest,” he said.

Companies benefit from outsourcing by allowing the company to focus on its core competencies, Kothari said. Most mortgage firms outsource a combination of insurance, appraisals all the other services. Other items that can be outsourced include functions, processes, such as administrative or financial, mortgage banking/brokerage, such as origination services and service providers.

MBA’s 2005 Cost of Servicing Operations Study and Forum, conducted earlier this year, included questions about outsourcing. Results of the study will be presented in June in Washington, D.C.

(Jamie McAfee contributed to this story.)
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The index for the first quarter stood at 97, compared to 96 from the fourth quarter of 2004. The index uses 100 as a baseline; numbers below 100 are generally lower to moderate in risk, while numbers above 100 suggest a higher risk of default.

“House price appreciation remains well above trend, but the prospects for future increases are eroding. These trends cause the default risk to be moderate,” said Dennis Capozza, professor of finance at the University of Michigan and a principal at UFA, based in Ann Arbor, Mich.

The index has risen by 25 percent since 2003, but remains moderate by historical standards. Capozza said under current economic conditions, nonprime lenders should expect defaults on loans currently being originated to be “significantly higher” than the average of loans originated in 1998 to 2003 but 3 percent less than the average rate on mortgages originated in the 1990s. 

By contrast the Mortgage Bankers Association’s National Delinquency Survey for the fourth quarter 2004 showed the annual decrease in delinquency rates for subprime fixed-rate loans was down by 143 basis points (from 10.50 percent to 9.07 percent) and down 338 basis points for adjustable-rate mortgage loans (from 12.90 percent to 9.52 percent). Since last quarter, the delinquency rate for subprime FRM loans decreased 60 basis points, while the delinquency rate for subprime ARM loans decreased 70 basis points.

Doug Duncan, MBA’s chief economist and senior vice president, attributed the strong showing in part to improving economic conditions. “The U.S. economy grew at almost 4 percent in annualized real terms during the fourth quarter of 2004. Combined with the low interest rate environment, consumers improved their household finances and the percentage of homeowners making their mortgage payments on time increased to nearly 96 percent,” he said.

UFA’s analysis is based on a ‘constant-quality’ loan—a loan with the same borrower, loan and collateral characteristics. The index reflects only the changes in current and expected future economic conditions, which are less favorable currently than in prior years. 
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Stacey Berger, executive vice president in the Bethesda, Md. office of Midland Loan Services, Overland Park, Kan., said incremental change begins at a departmental level with continuous improvement.

“Change becomes more significant through a divisional level with operations improvement, such as a formal, one-time project,” Berger said here at the Mortgage Bankers Association’s 2005 Commercial Real Estate/Multifamily Finance Asset Administration & Technology Expo. “From an enterprise level, reengineering can lead to a major breakthrough in change.”

“X-Engineering,” Berger said, describes change beyond the scope of the company. For example, a borrower electronically sending financial statements to Midland would be X-Engineering. Under the concept, a 5 to 10 percent improvement in process costs and efficiency take place on a departmental level, 10 to 20 percent improvement takes place on a divisional level and 20 percent or more in profit and cost improvement takes place on an enterprise and beyond level, he said. 

“If you can’t quantify where you want to be in the end, you should not change [the process] just to change it,” Berger said.

Tim Mueller, executive managing director at MortgageRamp, Atlanta, said outsourcing provides more control of business rather than less, because of service deliveries. The client can leverage more tasks, acquire less risk, hit a new market and still view completed work through management software. “Some of it is scale and the number of people,” he said.

For John Shaw, managing director at CIGNA Realty Investors, Hartford, Conn., change meant outsourcing more of the high-volume functions while keeping high-touch processes in-house. “We engineer the cost and, in the end, it ends up costing less,” he said.

Joseph Beggins, CEO of GEMSA Loan Services LP, Houston, said he improves business processes through a “Six Sigma” approach to measure improvement. Beggins said the approach builds new products and processes and fixes existing processes.

The approach includes a definition of project goals, measurement of current performance and determination of customer needs and analysis of root causes for defects as well as analyzing process options to meet customer needs. To fix existing processes, Six Sigma means eliminating defects and controlling future process performance. To build a new process, it translates to a design method that meets customer demand with verification of the process.

“The adoption of technology change is not so bad for a lot of our [staff] because we are working on it everyday,” Beggins said. “Real change is driven by the people in your business.”

Leadership can help promote the change but there still needs to be acceptance from the top to the bottom of an organization. “It is very difficult to get people to buy into change,” Berger said. “They are naturally reluctant to change and they have to buy into the benefits for them individually and for the organization.”

Beggins said his formula for faster change is to multiply the quality of an idea by the acceptance of the idea. The product is an accelerated rate of change. “Most ideas for change are good,” he said. “Acceptance of the idea accelerates change.”
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The Hartford office of Tremont Realty Capital arranged $20.1 million in financing for the Rio Norte Shopping Center, a 236,524 square foot retail project in Laredo, Texas. The borrowing entity was a partnership between a real estate investment trust (REIT) and a national investor. Rio Norte Shopping Center, anchored by Linens-N-Things, Office Max, and Toys “R” Us, was acquired by the partnership in 2004. “The borrower is adding additional space to the center and wanted a loan with some flexibility,” said Stephen Henderson, a senior director with Tremont’s Hartford office.

Henderson arranged the 3-year, non-recourse, floating rate loan with two extensions, through an undisclosed national bank. The loan was 80 percent LTV, had no reserves to the borrower and provided an earnout provision. “The borrowing entity had some rigid requirements created by the partnership of the REIT and the investor,” Henderson said. “Tremont was able to negotiate some unique problems to satisfy both the borrower and the bank.”

Henderson also structured financing for the acquisition of Queen Bee Plaza, a 65,752 square foot multi-tenant retail property in Southington, Conn. Its major tenants include Ocean State Job Lot (24,684 square feet) and a local health club (12,000 square feet).

Tremont arranged the $3.75 million loan, funded through an undisclosed regional bank. The three-year, non-recourse loan provided roughly 78 percent LTV with a floating interest rate. The property was 81 percent occupied at the time of closing. “The borrower looked to Tremont to structure a loan that would both maximize proceeds and maintain flexibility, which was important given the vacancy on the property," Henderson said.
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Network with lenders and gain knowledge of how they make these programs work. The conference will feature key updates on the following issues:

• Government housing and specialty product programs
• Credit and appraisal policies
• Endorsement and complianceissues

Speakers include Keith Pedigo, director of the Loan Guaranty Service at the VA; Russell Davis, administrator of the Rural Housing Service; and an official from the Federal Housing Administration to be determined.

Breakout sessions on June 2 examine Credit Policy/Underwriting; Selling Government Housing Finance Products; Getting Your Loans Endorsed or Guaranteed; FHA and VA Appraisal Issues; and a discussion with FHA’s Homeownership Center Directors, featuring panelists Ron Bailey of the Denver Homeownership Center; Joe Bates of the Santa Ana Homeownership Center; Charles Gardner of the Atlanta Homeownership Center and Engram Lloyd of the Philadelphia Homeownership Center. Tim Doyle, a director with MBA’s Government Affairs office, will moderate this session.

On June 3, breakout sessions discuss Managing Audits and Avoiding Indemnifications; Using Neighborhood Watch/Avoiding Credit Watch; and Specialty Product Sessions on Renovation Lending, Reverse Mortgages (HECMs) and Section 502 Guaranteed Housing Products.

The conference takes place at the Capital Hilton, 16th & K Streets, Washington, D.C. 20036. Program registrants are responsible for making their own hotel reservations by calling 1-800-HILTONS or 202/393-1000. Conference room rates start at $169 for single or double per night. MBA has also arranged airfare and car rental discounts.

For more information, go to the Conference Web Site at http://events.mortgagebankers.org/fha2005/default.html.
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Insurance companies and commercial servicers are preparing for the Terrorism Risk Insurance Act of 2002 (TRIA) to sunset at year’s end, even as the Mortgage Bankers Association and other trade groups work with Congress to extend its provisions. Also looming on the horizon: a busy predicted hurricane season that threatens to equal or even exceed last year’s performance.
 
Kathleen Dufraine, vice president of insurance financial operations at Wachovia Securities, Charlotte, N.C., said commercial interests face tough battles this year on both fronts. Industry support for TRIA, which provides a federal backstop for terrorism insurance, is under threat from consumer groups and from the Congressional Budget Office.

“The opposition basically feels that the insurance industry can afford this exposure. I simply ask how,” Dufraine said this week here at MBA’s 2005 Commercial Real Estate/Multifamily Finance Asset Administration & Technology Expo. “Currently, there is roughly $50 billion in the P&C [property and casualty] sector. Risk modelers out there have come up with figures like $182 billion. This simple math just tells you that this insurance number is a little short.”

Under TRIA, the federal government supplements insurance company claims on property and casualty loss over a certain percentage. After September 11, 2001, without TRIA, commercial property owners faced policies with terrorism exclusions or exorbitant fees to purchase terrorism insurance. Commercial servicers insisted on terrorism insurance in policy renewals and some loans moved to special servicers without the proper insurance. Meanwhile, ratings agencies threatened to lower ratings on commercial mortgage backed securities (CMBS) pools without terrorism insurance.

“There is intelligence out there that if TRIA goes away, most companies will take coverage away,” Dufraine said. “In fact, many terrorism [insurance] endorsements were issued from the start with the condition of TRIA so that the trigger for coverage is only if TRIA is still enforced.”

While some companies issue new endorsements with sunset clauses, other companies are writing short term policies that will expire at the end of 2005, Dufraine said.

MBA supports legislation that would extend TRIA through December 2007. MBA is a member of the Coalition to Insure Against Terrorism (CIAT), which seeks a long term solution to the issue after TRIA’s extension.

S. 467, the Terrorism Insurance Backstop Extension Act of 2005, was introduced in February by Sens. Christopher Dodd, D-Conn., and Robert Bennett, R-Utah. The bill would reauthorize and extend the federal terrorism reinsurance program provided by TRIA. In March, H.R. 1153 was introduced by Reps. Tom Capuano, D-Mass.; Steve Israel, D-N.Y.; Barney Frank, D-Mass.; Paul Kanjorski, D-Pa.; and Joseph Crowley, D-N.Y. That bill also proposes to extend TRIA.

the U.S. Chamber of Commerce, the insurance community, the commercial real estate and lending communities, and Federal Reserve Chairman Alan Greenspan all support a TRIA extension. “There are [many] people that do believe that TRIA should be extended,” Dufraine said.

Rays of hope lie in the standard fire policy, Dufraine said. Most terrorist acts involve fire and contract language states that fire will always have coverage “regardless of the proximate cause of the damage,” she said. “We can also feel somewhat comfortable that some states will not allow for exclusionary language.”

The bottom line, however, is that without the capacity to handle exposure for acts of terrorism, “our market will dry up significantly and we will be back to where we were pre-TRIA,” Dufraine said.

TRIA’s language said the Treasury Department must submit a market survey on TRIA to Congress no later than June 30. Congress is waiting on the survey before making a determination as to TRIA’s extension and a possible long term solution to terrorism insurance in the property and casualty sector. Dufraine noted that

June also marks the beginning of the Atlantic hurricane season, through November 30. Tropical Storm Risk (TSR), led by the Benfield Hazard Research Centre at University College London, gave a “76 percent probability” in February of an above-normal Atlantic hurricane season with eight hurricanes for the Atlantic basin as a whole and four intense hurricanes. The National Hurricane Center goes further, predicting 13 total storms and four major hurricanes.

TSR claims the upsurge in hurricane activity will continue in Florida from last summer’s four hurricanes that hit the state. “A borrower cannot bind coverage during hurricane season so they better have it before June first because the underwriters are probably not going to give it to them after that,” Dufraine said. “Those were very challenging times [in 2004] so be aware. Coverage is not bound when a hurricane is facing landfall.”

Dufraine said a busy hurricane season could spur a “tremendous drain on cash,” especially in Florida. Deductibles in Florida are percentage deductibles and many properties were hit with percentage deductibles in the last storm season.

Dufraine said the deductibles for hurricanes in Florida will remain per occurrence. “Two storms, two deductibles,” she said. “Some deductibles may even be higher on this renewal period. Check in with borrowers to make sure that the coverage is adequate and their deductibles are within their reach. Pray you don’t have a lot of properties in Florida because I think it’s going to get hit again pretty bad this year.”

Bernie Brown, president of Insurance Advisors LLC, Stamford, Conn., said reinsurance companies in Bermuda that raised capital after September 11 are more aggressive on windstorm pricing and property insurance because of percentage deductibles. Single-family homes were also hit harder than commercial real estate last year in Florida. Brown noted that most reinsurance companies are smaller than primary insurance companies and mindful of exposure. “Pricing is not as bad as one would, otherwise, intuitively think,” Brown said.

Brown said one of the biggest flaws in TRIA is that the federal government did not back up the reinsurance industry as well as the primary insurance industry. “It would create more capacity for reinsurers and they would learn more about [terrorism insurance], start pricing it and add more capacity in the event of TRIA expiration,” Brown said.
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