Margins Just as Thin For Overseas Firms

Although there still may be some hope that European markets can avoid the problems seen in the United States, the servicing profit squeeze does appear to be occurring in both markets, Standard & Poor's credit analysts said in a recent webcast conference call.

S&P analysts indicated that it is largely in the nature of the business, which has come to largely rely on economies of scale.

Because of this, not only have servicers been vulnerable in terms of having insufficient resources and regulatory pressures (see related story), but they have been increasingly turning to international outsourcers to help them manage costs - a practice that has become politically sensitive in the United States.

S&P credit analyst Richard Koch noted that 15 servicers on S&P's select servicer list have outsourced internationally and others are considering doing so. He said a third category of servicers have experimented with the practice but eventually shied away from it, citing concerns that included high turnover and training issues.

Outsourcing is a long-established business practice in mortgage servicing and a cost-efficient way of doing business, said Mr. Koch. It has traditionally been used in the United States to handle overflow volume, most notably in call centers, Mr. Koch said.

But the model has expanded over the year to the point where it has the potential to span the whole servicing process, and Standard & Poor's has developed criteria for managing outsourced relationship that include a performance review, an annual recertification process, he said. Other criteria include an examination of whether the vendor itself is outsourcing overseas or offshore and whether there are confidentiality issues.

Although Mr. Koch considers international outsourcing's economics too attractive to ignore, he also believes that the challenges in international outsourcing are too real to ignore. These include political and regulatory concerns, linguistic differences and the risks posed by the potential for political instability and foreign exchange fluctuation, he said.

When it comes to the most politically contentious issue - whether international outsourcing is hurting the availability of U.S. jobs in the country, the answer appears to be yes, Mr. Koch said, citing various statistics supporting this. However, statistics he cited appeared to be less clear in terms to the extent of those job losses. For example, he cited one case depicting a very low percentage and another indicating that over the next decade or so millions of jobs could be lost.

A majority of the jobs being outsourced internationally are currently moving to India.

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