April 2005 Sector Report: BPO

BPO Opportunities in the US Residential Mortgage Market

Pijush Sinha, VP
(+91) 22 5648-0050
pijush.sinha@avendus.com

Francesco Paola, VP
(+1) 520 202-9816
fpaola@trinitybpm.com
Executive Summary
Business Process Outsourcing (BPO) encompasses a wide range of activities across multiple
industries and has been at the fore-front of recent corporate and political discussions. There have
been, however, few efforts to understand BPO opportunities in specific industry verticals.

Few industries present the kind of opportunities for BPO as the US residential mortgage market. The
largest debt market in the world, the US residential mortgage market, or ecosystem, had $7.6 Trillion
of outstanding debt across 59 Million loans at the end of 2004.

As the mortgage industry faces inherent cyclicality thanks to interest rate fluctuations and cost
pressures due to increasing competition among its participants, companies in this market are
beginning to explore offshore-based outsourcing across a wide array of services.

The key findings of this research effort jointly undertaken by Trinity Partners Inc, a mortgage
domain focused BPO service provider and Avendus Advisors, an investment bank specializing in IT
and Outsourcing markets, are as follows:

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
approximately $150 Million, employing about 7500 people. We estimate that the mortgage
banking BPO market in India will grow to approximately $1.1 Billion over the next 5 years.
Offshore-based outsourcing is expected to generate cost savings in the range of 30-50% along
with other long-term strategic benefits:
Enhanced productivity and reduced cycle times leading to more efficient operations
Competitively positioned organizations that will be able to manage capacity in line with
market fluctuations via an extended offshore backoffice
Offshore BPO service providers looking to create a competitive mortgage focused play will
require:
In-depth vertical domain knowledge
Technology-enabled process delivery capabilities
Strong balance sheet
Scalable operations and infrastructure

Offshore-based delivery of mortgage processes as a concept has been proven, with firms such as
Countrywide Financial, IndyMac Bank, Greenpoint Mortgage and CitiMortgage successfully
leveraging India-based delivery centers.

India will be the preferred destination for vertical domain focused BPO providers, thanks to the
highly educated and skilled workforce, language capabilities and the strong work ethic.

We expect offshore-based outsourcing to become a key strategic initiative among US mortgage

lenders, servicers and mortgage investors, leading to the emergence of mortgage domain focused
BPO players and captive centers in India in the medium term.
 Table of Contents
Page no.
EXECUTIVE SUMMARY.........................................................................................................................................1
THE RESIDENTIAL MORTGAGE BANKING MARKET IN THE US...........................................................5
The Mortgage Banking Ecosystem.............................................................................................................................5
Key Market Participants and their Functions.............................................................................................................6
Loan Production...................................................................................................................................................6
Secondary Marketing...........................................................................................................................................8
Loan Administration.............................................................................................................................................10
Lender Services....................................................................................................................................................10
Information and Dollar Flow.......................................................................................................................................11
Mortgage Processing Economics................................................................................................................................13
Loan Production...................................................................................................................................................13
Secondary Marketing...........................................................................................................................................14
Loan Administration.............................................................................................................................................15
Lender Services....................................................................................................................................................16
Market Size and Growth Trends.................................................................................................................................16
Business Trends and Top Priorities in the Mortgage Ecosystem................................................................................18
BPO OPPORTUNITIES IN MORTGAGE BANKING........................................................................................21
Size of the Outsourcing Market in Residential Mortgage Banking............................................................................22
Benefits of Offshoring Processes................................................................................................................................23
Cost Savings from Offshore Outsourcing...................................................................................................................24
Offshorable Processes.................................................................................................................................................25
What Processes are Currently Outsourced?................................................................................................................27
Factors to Consider before Offshoring.......................................................................................................................27
Keys to a Successful Partnership................................................................................................................................29
STATE OF THE MORTGAGE OUTSOURCING MARKET.............................................................................31
Nature of the Market and Key Players.......................................................................................................................31
Onshore Market....................................................................................................................................................31
Offshore Market...................................................................................................................................................31
Trends in the Mortgage BPO Market.........................................................................................................................33
Case Study of an Offshore Outsourcing Relationship................................................................................................34
The Business Drivers...........................................................................................................................................34
Phase 1: Short-term deployment: low-risk, high impact..................................................................................... 34
Phase 2: Offshore as an enabler of the long-term strategy...................................................................................35
The Extent of Offshoring.....................................................................................................................................36
Benefits Achieved................................................................................................................................................36
Mortgage Banking BPO Activity in India Today.......................................................................................................38
CONCLUSION.........................................................................................................................................................39
APPENDIX 1: OVERVIEW OF THE INDIAN BPO MARKET........................................................................40
Market Size and Growth.............................................................................................................................................40
Growth Segments in the Indian BPO Market.............................................................................................................40
Participants in the BPO Market..................................................................................................................................41
Customer Segments....................................................................................................................................................41
Key Success Factors for BPO Players in India..........................................................................................................42
Emerging Trends in the BPO Market.........................................................................................................................43
Capital Infusion into the BPO Market in India...........................................................................................................43
M&A Transactions in the BPO Market in India.........................................................................................................43
Acquisition by Global Players of Indian BPO Companies.........................................................................................44
Acquisition by Indian Players of Indian BPO Companies.........................................................................................44
Acquisition by Indian Players of Global BPO Companies........................................................................................44
Conclusion..................................................................................................................................................................44
APPENDIX 2: LIST OF ABBREVIATIONS.........................................................................................................45

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 List of Exhibits
Name Page no.
Exhibit 1: Interaction between Mortgage Participants.................................................................................................6
Exhibit 2: Top Ten Originators in CY2004....................................................................................................................7
Exhibit 3: Top Originators by Market Share Percentage CY2004...............................................................................7
Exhibit 4: Top 10 Non-governmental Investors in CY2004............................................................................................9
Exhibit 5: Top Non-governmental Investors by Market Share Percentage CY2004.......................................................9
Exhibit 6: Top 10 Servicers in CY2004........................................................................................................................10
Exhibit 7: Top Servicers by Market Share Percentage - December 31, 2004..............................................................10
Exhibit 8: Sample Players in Lender Services..............................................................................................................11
Exhibit 9: Dollar Flow among Mortgage Participants..................................................................................................11
Exhibit 10: Description of Dollar Flow among Mortgage Participants.........................................................................12
Exhibit 11: Process Chain in Loan Production.............................................................................................................13
Exhibit 12: 2003 Production Cost Average per Loan....................................................................................................14
Exhibit 13: Process Chain in Secondary Marketing.....................................................................................................14
Exhibit 14: Process Chain in Loan Administration.......................................................................................................15
Exhibit 15: 2003 Loan Administration Cost Average per Loan..................................................................................15
Exhibit 16: Product Domains in Lender Services.......................................................................................................16
Exhibit 17: Sample Products Offered By Lender Service Providers..........................................................................16
Exhibit 18: Outstanding Mortgage Debt ($ Billion)...................................................................................................17
Exhibit 19: Trend in Mortgage Interest Rates.............................................................................................................17
Exhibit 20: Residential Mortgage Origination Volume ($ Billion).............................................................................17
Exhibit 21: Refinance as Percentage of Total Originations........................................................................................18
Exhibit 22: Mortgage Process Value Chain..................................................................................................................21
Exhibit 23: Addressable BPO Market Size for Loan Production and Administration...................................................22
Exhibit 24: Cost Savings in Loan Production Due to Outsourcing & Offshoring..........................................................24
Exhibit 25: Cost Savings in Loan Administration Due to Offshoring & Outsourcing...............................................25
Exhibit 26: Evaluation Criteria to Determine Offshorable Processes..........................................................................25
Exhibit 27: Sample Offshorable Processes...................................................................................................................26
Exhibit 28: Key Factors to Consider in an Offshore Strategy.......................................................................................27
Exhibit 29: Offshore Delivery Models........................................................................................................................28
Exhibit 30: Benefits & Risks of Different Offshore Delivery Models..........................................................................29
Exhibit 31: Sample Players in the Onshore Mortgage Outsourcing Market.................................................................31
Exhibit 32: Entry Point into BPO Market.....................................................................................................................32
Exhibit 33: Example of Different Categories of BPO Players......................................................................................32
Exhibit 34: Representative Set of Third Party Mortgage BPO Players in India............................................................33
Exhibit 35: Case Study, Phase 1 Requirements...........................................................................................................34
Exhibit 36: Case Study, Phase 1 Benefits.....................................................................................................................35
Exhibit 37: Case Study, Phase 2 Requirements...........................................................................................................35
Exhibit 38: Case Study, Sample Processes Outsourced to Third Party.......................................................................36
Exhibit 39: Case Study, Processes Offshored and Benefits Achieved........................................................................37
Exhibit 40: Examples of Captive BPO Operations in India in Mortgage Banking........................................................38
Exhibit 41: Examples of Third Party BPO Operations in India in Mortgage Banking..................................................38
Exhibit 42: Growth of Indian BPO Industry.................................................................................................................40
Exhibit 43: Revenue Productivity in Indian BPO Industry (Annual Revenue per Employee)......................................40
Exhibit 44: Segment-wise Breakup of Indian BPO Market (2004)..............................................................................40
Exhibit 45: Services across Segments in Indian BPO Market......................................................................................41
Exhibit 46: Revenue Breakup in Indian BPO Market across Domains........................................................................41
Exhibit 47: Representative Set of Vendors and Customers..........................................................................................42
Exhibit 48: Critical Success Factors for BPO Players in India.....................................................................................42
Exhibit 49: Areas of Focus for Various Categories of BPO Players.............................................................................42
Exhibit 50: PE Transactions since January 2004 in the Indian BPO Space...................................................................43
Exhibit 51: Analysis of M&A Transactions since January 2004 in the Indian BPO Space............................................44
Exhibit 52: Acquisition by Global Players of Indian BPO Companies since January 2004...........................................44
Exhibit 53: Acquisition of Indian BPO Players by Indian BPO Companies since January 2004...................................44
Exhibit 54: Acquisition by Indian Players of Global BPO Companies since January 2004...........................................44

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4
 The Residential Mortgage Banking Market in the US
The Residential Mortgage Banking Market in the US
This section provides an in-depth overview of the US
mortgage banking ecosystem. It discusses the
fundamental players and their interactions, products and
services offered, the economics of the industry, general
industry metrics, and market size and trends.
The Mortgage Banking Ecosystem
The residential mortgage banking market in the United
States, the largest debt market in the world, has long
worked to facilitate liquidity in one of the most robust
housing markets in the world. A complex and interrelated
set of activities and players make up this market that
involves the origination, secondary market sale, and
servicing of loans that are secured by residential real
estate. These players work to ensure that capital is
available in all geographies for borrowers who need to
build new homes or buy existing homes which they
otherwise could not afford. These players also work to
ensure liquidity in the secondary market where loans are
bought and sold in order to transfer interest rate risk from
mortgage lenders to mortgage investors, guarantee the
availability of a various set of loan products for borrowers
in all income levels and geographies and enable the
packaging of loans as debt products to investors who
invest in mortgage-backed securities.
The Residential mortgage market includes single family
homes, condominiums and cooperatives. The
Commercial mortgage market, on the other hand,
includes all commercial properties that produce income
from rents. Individuals or companies develop
commercial properties (e.g. shopping malls, office
buildings) and sell these properties to investors (or hold
on to them as investment vehicles), making money from
the cash flows generated by the property's rent and
property appreciation.
This report will focus solely on the Residential mortgage
market in the United States.
The United States and its nearly 300 Million residents
have made significant investments in residential real
estate (home values account for nearly $15 Trillion in
assets). Despite a recent upswing in interest rates, the
market for new homes, home sales, and home ownership
continues to be as robust as ever.
At the end of 2004 there were 122.7 Million residential
housing units in the US, up from 121.4 Million at the
end of 2003 (Source: US Census Bureau)
The home ownership rate at the end of 2004 was
69.2%, a number that has risen slowly, but steadily
since 1993 (Source: US Census Bureau)
There were 1,955,000 new housing starts in 2004, up
from 1,847,000 new housing starts in 2003 (Source:
US Census Bureau)
1,086,000 new homes were sold in 2003 and
1,200,000 homes were sold in 2004 (Source: US
Census Bureau)
The past ten years have also seen a significant growth in
the lending side of the market, due to a number of factors
including:
Interest rates that have trended downward since the
early 1990's (although rates are now on an upswing)
and caused a great increase in refinancings and an
increased rate of home ownership among US residents
The burgeoning growth and corresponding product
diversification of the sub-prime market, which allows
borrowers of nearly all credit ratings and income
levels to have access to borrowed funds
A surge in second home purchases, either as
investment properties or vacation homes - 23% of
homes purchased in 2004 were purchased for
investment and 13% were purchased as vacation
homes (Source: National Association of Realtors)
An ever-increasing amount of new homes being built
each year in the United States
A more detailed analysis of how interest rate highs and
lows have affected the recent growth of the industry is
outlined later in this report (See “Market Size and Growth
Trends”).
At the highest level, residential mortgage banking is
composed of four key interrelated sets of activities: Loan
Production (origination), Secondary Marketing (selling
and securitizing loans), Warehousing (funding
originations) and Loan Administration (servicing).
These four areas encompass all processes involved in the
life of a mortgage from application through termination.
5
 Sector Report: BPO

Loan Production (Origination) involves the interactions between players in the mortgage ecosystem.
creation of mortgages between a borrower and a
lender (usually represented by a retail loan officer or Numerous private and public companies, individuals,
wholesale mortgage broker). government agencies, and government sponsored
Secondary Marketing is the purchase and enterprises (GSEs) provide products and services within
ownership of already existing loans by an investor any or all of these high-level activities. Some players
from a mortgage bank or correspondent lender and the have offerings in all of these areas and are known as full-
management of risk associated with these loans. Often service mortgage banks, while others specialize in one
the purchased loans are pooled to form a debt particular aspect of the mortgage market. It is important
instrument known as a mortgage-backed security. to note that the definitions of the players in this market
Loan Administration (Servicing) is the collection, are often blurry, as they are engaged in many activities
recordation, and remittance of loan payments to the along the value chain. Many mortgage banking players
investor. Loan administration also includes are engaged in both retail and wholesale mortgage
administration of escrow accounts, customer service banking activities and have multiple lines of business.
activities, and loan terminations (either through pay- Thus, they are involved in multiple areas of the market
offs or foreclosures). including originating loans, buying loans, selling loans,
Warehousing is funding the origination of loans on a and servicing loans. The next section of this paper will
short-term basis, until the loans have been sold on the attempt to outline the characteristics of players involved
secondary market. Typically, the funding is done via in loan production, secondary marketing, loan
short-term revolving lines of credit. administration and lender services (a subset of activities
in loan production).
This report will focus only on Loan Production,
Secondary Marketing and Loan Administration, as Key Market Participants and their Functions
Warehousing functions do not provide significant Loan Production
opportunities for business process outsourcing and Loan Production, or Origination, encompasses all
offshoring. Exhibit 1 highlights some of the high-level processes involved from the sourcing of a new loan
Exhibit 1: Interaction between Mortgage Participants
Loan Production Warehousing
Lender
Loan Officer Service
or Broker Provider
Customer shops for
mortgage product and
fills out application with Lender service providers
broker or loan officer 2 3 deliver ancillary services
necessary to close the loan
1 Loan officer or broker 3
submits application to
originator for processing Lender draws down the
Borrower Mortgage Warehouse line of credit
Lender to fund the loan
3 Lender Processes, for the borrower
Underwrites, Funds,
Closes the loan Originator sells loan and
8 ships it to mortgage investor
Warehouse
or Government Sponsored
Servicer services loan - collects Entity (GSE) Bank
payments, collects and disburses escrow 6
funds, charges fees and penalties, 4
provides customer service Investor pays servicer
to service the loan and
servicer remits customer Investor Investor pays off
payments to investor Warehouse line of credit on
Servicer behalf of originator
Investors package loans and sell them as
mortgage-backed securities (MBS) 5
7
MBS Investors
Pension Funds,
Insurance Companies, etc.

Loan Administration Secondary Marketing

Source: Trinity Partners
6
 The Residential Mortgage Banking Market in the US

application, to the closing and funding of that loan, to Mortgage insurance companies (either private or
the ultimate sale of that loan in the secondary governmental) who provide insurance to protect
mortgage market. Numerous industry players are lenders against a loss in the event of a default by the
involved in this industry segment. borrower.
Mortgage brokers that find prospective borrowers
and source loan applications. The top ten originators in 2004 are highlighted in Exhibit
Mortgage Lenders 2. The origination volume numbers include retail and
Retail mortgage banking firms that source loans, wholesale origination numbers only. Correspondent
process them, close them, and sell them in the originations are not included. Exhibit 3 shows the market
secondary mortgage market. share for 2004 originations.
Wholesale mortgage banking firms that “buy” or
acquire loans from retail channels including: Exhibit 3: Top Originators by Market Share Percentage CY2004
Independent retail mortgage brokers
Wells Fargo Home Mortgage
'Net' branches whose mortgage brokers or loan 11%
officers are highly independent while the Others
mortgage bank performs the loan processing and 47% Countrywide Financial Corp.
closing functions. 10%
Internet channels who take web-based loan Washington Mutual
applications. 9%
Correspondent lenders who source loans under Chase Home Finance
their own private label and often do some loan 6%
processing as well.
Bank of America
Warehouse banks that fund loans at closing by 5%
extending warehouse lines of credit to mortgage National City Mortgage
lenders. 3%
Lender service providers who deliver multiple Citi Mortgage, Inc.
Cendant Mortgage
services that directly support the mortgage banking 2%
3%
process (these providers are looked at in detail later ABN Amro Mortgage Golden West Financial Corp.
2% 2%
in the report).
Source: National Mortgage News
Exhibit 2: Top Ten Originators in CY2004

Origination Revenue Market P/E Ratio

FY 2004 Originator Name Volume Employees
(TTM) Cap (Forward)
($Million)
Wells Fargo Home Mortgage $216,785 145,500 $20.97B $102.89B 11.96
Countrywide Financial Corp. $202,417 42,141 $8.57B $19.26B 7.59
Washington Mutual $182,883 52,579 $11.35B $34.77B 10.14
Chase Home Finance $122,736 160,968 $30.60B $123.64B 10.16
Bank of America $103,770 175,742 $43.23B $184.84B 10.25
National City Mortgage $60,184 35,230 $6.10B $22.05B 10.24
CitiMortgage, Inc. $52,396 294,000 $66.71B $242.31B 9.99
Golden West Financial Corp. $48,965 9,399 $4.18B $18.90B 11.55
ABN Amro Mortgage $46,462 99,271 $25.53B $42.20B 9.33
PHH (Cendant Mortgage) $45,477 87,000 $19.78B $21.81B 12.30
Note: Employee, Revenue, Market Cap, and P/E numbers are totals/values for the parent company
TTM: Trailing Twelve Months
Market Cap Data as of April 12, 2005
Source: National Mortgage News, Yahoo Finance
7

From a product perspective, mortgage lenders offer a
variety of different products based on the borrower's
profile and needs. At the highest level, lenders offer
purchase loans for the purchase of a new home,
refinancing loans to pay off an existing mortgage and take
out a new loan at a more favorable rate, and home equity
loans or lines of credit (HELOC) for borrowers to borrow
money against existing equity in their home. These three
products are distinct in that they serve different customer
needs for borrowing and occur at different points in a
borrower's lifecycle. Beyond this high level distinction,
loan products are further differentiated when other factors
are taken into consideration. The loan size, risk factors of
the borrower including credit rating and recent
delinquencies, government sponsorship, and type of loan
program are all factors that determine which particular
product a borrower chooses/is qualified for.
The distinction between mortgage programs is very
important in differentiating loan products. A mortgage
program refers to the method in which the loan terms and
payments are structured. The most common type of loan
programs are fixed rate mortgages, adjustable rate
mortgages, combinations of fixed rate and adjustable or
hybrids, and balloon loans. Fixed rate mortgages have a
fixed rate over the life of the loan, usually 15 or 30 years
(although other terms are available). For fixed rate
mortgages, shorter terms usually yield lower interest
rates. Adjustable rate mortgages have variable interest
rates and payments that change over the life of the loan.
They are usually tied to an interest rate index, such as the
London Inter-Bank Offered Rate (LIBOR) or the US
Treasury Index and the rate of the loan fluctuates as the
index moves upward and downward. Hybrid loans come
in many different varieties, but they are typically loans
which are fixed for a period of time and adjustable
thereafter. Balloon loans are short-term fixed rate loans
that have fixed monthly payments based usually upon a
30-year fully amortizing schedule and a lump sum
payment at the end of its term. Usually they have terms of
3, 5 and 7 years.
While the first two distinctions in loan products are tied
more to buyer choice and need, there are other
distinctions between loan products that are tied to a
particular buyer's profile. For instance, some buyers
qualify for government loans based on past military
service, a rural address, or lower income status.
Government loans including VA Loans, Federal Housing
Administration Loans (FHA), and Rural Housing Service
(RHS) loans are all guaranteed and subsidized by various
8
Sector Report: BPO
governmental agencies to ensure lower costs and greater
availability to the consumers who qualify for them.
The amount of a loan also determines which type of
product and rate is available for the consumer. Loans that
conform to the Fannie Mae and Freddie Mac standards for
loan amount, loan-to-value ratio, and credit rating of the
borrower are called conforming loans. These loans are
guaranteed by Fannie Mae and Freddie Mac for purchase
in the secondary market, thus ensuring liquidity in the
mortgage market. Loans that do not meet these
requirements are called non-conforming loans. Non-
conforming loans that exceed the limit for loan amount
are called Jumbo loans. They sometimes have higher
interest rates because they are more difficult to sell on the
secondary market. Non-conforming loans that do not
meet the borrower credit rating requirement for Fannie
Mae and Freddie Mac are called “Alt-A”, “B”, “C”, and
“D” paper loans or sub-prime loans, as opposed to “A”
paper conforming loans.
Thus, a borrower's credit rating and credit history also
affect the type of loan available to them. Borrowers with
impaired credit may not qualify for conforming loan
products and they must seek out a sub-prime mortgage in
order to finance their home. Sub-prime mortgages most
often have higher interest rates than conforming or prime
mortgages, given that the borrower is seen as a greater
risk for foreclosure and that the processing may be more
involved and expensive. The sub-prime borrower thus
pays a premium to borrow money.
Secondary Marketing
Secondary Marketing involves the processes related to
the procurement of closed and funded loans from
mortgage lenders (correspondent lenders). Investors can
buy individual loans and purchase pools of loans that
have already been closed and funded under the
originating mortgage lender's name.
Loans are committed via a “forward trade” with an
investor for a pool of loans that meet certain criteria (e.g.
product type, interest rate, borrower profile, other risk
factors, etc). The loans are committed prior to closing,
either before they are actually originated, or while they
are in the process of being originated (“in the pipeline”).
In this sense, the secondary market drives activity in the
primary market.
 The Residential Mortgage Banking Market in the US

The lender commits to deliver a certain loan volume The top ten non-governmental investors in 2004 are
during a pre-determined period of time to the investor- highlighted in Exhibit 4. The market share for these
penalties are levied to the lender if the pool amount is not investors in 2004 is shown in Exhibit 5.
met or loan quality criteria are inferior to the
predetermined parameters. In some instances, early
delivery premiums are paid to lenders. Exhibit 5: Top Non-governmental Investors by Market
Share Percentage CY2004
There are several different types of investors involved in
buying closed and funded loans, creating mortgage-
backed securities and investing in those securities.
Countrywide Financial
Corp. 17%
Conduit divisions of other mortgage banks or
investment banks who purchase loans. These
“buying” firms acquire loans for the purpose of Others Wells Fargo Home
36%
holding in portfolio and/or loan administration, or for Mortgage 9%
resale or securitization. e.g. Countrywide, Morgan
Stanley, Aurora Loan Services (owned by Lehman
Washington
Brothers). Mutual 8%
GSEs such as Fannie Mae and Freddie Mac that HSBC Mortgage
Corp. USA Chase Home
purchase and securitize mortgages with the stated goal 1% Finance 7%
of providing liquidity and capital balance in the
mortgage market. IndyMac Bancorp, GMAC Residential
Inc 2% Holdings 6%
Ginnie Mae which guarantees mortgage-backed
securities issued by lenders and backed by Aurora Loan Services, Inc CitiMortgage, Inc
4% 6%
government loans.
Homecomings/GMAC-RFC
Life Insurance Companies, Pension Funds, Hedge 4%
Funds and other Institutional Investors who invest
in mortgage-backed securities as sources of income. Source: National Mortgage News

Exhibit 4: Top 10 Non-governmental Investors in CY2004

Investor Name FY2004 Correspondent Revenue P/E Ratio

Employees Market Cap
Volume ($Million) (TTM) (Forward)
Countrywide Financial Corp. $160,589 42,141 $8.57B $19.26B 7.59
Wells Fargo Home Mortgage $81,678 145,500 $20.97B $102.89B 11.96
Washington Mutual $72,471 52,579 $11.35B $34.77B 10.14
Chase Home Finance $64,267 160,968 $30.60B $123.64B 10.16
GMAC Residential Holdings $51,616 324,000 $193.52B $16.38B 10.14
CitiMortgage $51,340 294,000 $66.71B $242.31B 9.99
Homecoming/GMAC-RFC $35,623 324,000 $193.52B $16.38B 10.14
Aurora Loan Services, Inc. $31,887 19,600 $23.52B $26.44B 10.73
IndyMac Bancorp, Inc. $13,750 5,300 $0.76B $2.24B 7.97
HSBC Mortgage Corp. $10,715 253,000 $50.20B $178.44B 12.10
Note: Employee, Revenue, Market Cap, and P/E numbers are totals/values for the parent company

TTM: Trailing Twelve Months

Market Cap Data as of April 12, 2005
Source: National Mortgage News, Yahoo Finance
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 Sector Report: BPO

Loan Administration Exhibit 7: Top Servicers by Market Share Percentage

December 31, 2004
Loan Administration, or Servicing, includes
administrative and financial tasks associated with
management of closed mortgage loans for an investor. Countrywide Financial
Corp. 11%
Loan administration encompasses both traditional
Wells Fargo Home
“custodial” functions as well customer service and asset Mortgage 10%
management servicing. Others 44%

Washington
Several different entities service loans in the mortgage Mutual 9%
industry.
Investors who buy the servicing rights on the loans Chase Home
they purchase Finance 7%
Mortgage Lenders who retain the servicing rights on CitiMortgage, Inc. 5%
loans that they sell into the secondary market or who Bank of America 4%
service the loans they own GMAC Residential
Cendant Mortgage 2%
Sub-servicers who service loans on behalf of Holdings 3%
investors for an annual fee based on principal size ABN Amro Mortgage 3%

National City Mortgage 2%

The top ten servicers in 2004, by servicing volume, are
highlighted in Exhibit 6. The market share for these
servicers is shown in Exhibit 7. Source: National Mortgage News
Exhibit 6: Top 10 Servicers in CY2004

EOY 2004
Revenue Market P/E Ratio
Servicer Name Servicing Volume Employees
(TTM) Cap (Forward)
($Million)
Countrywide Financial Corp. $838,322 42,141 $8.57B $19.26B 7.59
Wells Fargo Home Mortgage $782,378 145,500 $20.97B $102.89B 11.96
Washington Mutual $727,571 52,579 $11.35B $34.77B 10.14
Chase Home Finance $562,708 160,968 $30.60B $123.64B 10.16
CitiMortgage $364,268 294,000 $66.71B $242.31B 9.99
Bank of America $332,467 175,742 $43.23B $184.84B 10.25
GMAC Residential Holdings $231,766 324,000 $193.52B $16.38B 10.14
ABN Amro Mortgage $201,154 99,271 $25.53B $42.20B 9.33
National City Mortgage $165,060 35,230 $6.10B $22.05B 10.24
Cendant Mortgage $145,716 87,000 $19.78B $21.81B 12.30
Note: Employee, Revenue, Market Cap, and P/E numbers are totals/values for the parent company
TTM: Trailing Twelve Months
Market Cap Data as of April 12, 2005
Source: National Mortgage News, Yahoo Finance

Lender Services
Lender service providers deliver multiple services that
directly support the mortgage banking process. These
services are provided at various points during the
lifecycle of the loan production process, and others also
apply during the loan administration phase after the loan
has closed. Some mortgage banks perform some of these
functions through internal departments, but many use the
services of companies that are specialized in these areas
and provide these services to mortgage banks on a fee
basis. Multiple entities provide lender services to
mortgage banks and mortgage servicers.
Title & Escrow Companies that examine the public
record to establish the proper ownership, liens and

10
 The Residential Mortgage Banking Market in the US

obligations associated with a subject property. Title Some of the larger lender services players that offer a
companies often also provide escrow services. range of products and services in title, escrow, flood,
Appraisers/Appraisal Companies who estimate the appraisal, credit, and insurance are listed in Exhibit 8.
value of the collateral associated with the loan.
Homeowners' Insurance Companies who provide Information and Dollar Flow
insurance policies to protect against property The flow of information and dollars within the mortgage
damages. industry is a complex flow that involves numerous
Credit Reporting Agencies who provide individuals, organizations, platforms, and processes.
independent reports on the credit histories of Exhibit 9 illustrates the way money flows through the
mortgage applicants. mortgage banking ecosystem lifecycle. By
Flood Insurance Companies who provide insurance understanding this money flow, we can identify the
against damages due to floods in designated flood general revenue potential of each player in the ecosystem,
zones. indirectly illustrating each participant's ability to invest
the capital in strategic and tactical endeavors.
The lender services market is a highly fragmented and
regional market, with very small players providing many Assumptions
of the services. Only a few companies have a strong In order to more clearly illustrate the player interactions
nationwide presence. and money flow in the market, we have made the
following assumptions:
Exhibit 8: Sample Players in Lender Services
Servicer and Investor are separate entities
Lender Services Revenue Market P/E Ratio Lender sells all loans
Provider (TTM) Cap (Forward) Lender Service Providers are separate entities from
Lender
Fidelity National $8.30B $5.58B 9.77 Broker receives 100% of rate sheet spread
Financial
First American $6.72B $3.03B 9.20
Stewart Mortgage $2.18B $0.68B 11.95 Notes
LandAmerica $3.52B $0.89B 6.08 Arrows delineate SOURCE and FINAL recipient of
Source: Trinity Partners

Exhibit 9: Dollar Flow among Mortgage Participants

Rate Sheet Spread
(0.75% - 1% of loan value)
Monthly Interest Payments
Loan Funds

Loan Officer Origination Fees Mortgage Service Release Premium (SRP) Servicer
Origination Fees Borrower Lender
or Broker (0.5% - 1% of loan value)

Interest Payments
(Until sold to investor) Combined to
Monthly 0.5% - 2.5%
Insurance Loan Funds of loan value
Payments Servicing Fees
Closing Cost Fees Warehouse Interest (0.25% - 0.5% per year of
Spread Payments Loan Outstanding Principle)
Secondary Market
Premium
Private Mortgage Lender
Insurance Service Warehouse Bank Investor
(PMI) Provider Loan Funds

Interest Payments

MBS Investors
Pension Funds, Insurance Firms etc.

Source: Trinity Partners, Handbook of Mortgage Lending

11
 Sector Report: BPO

payment, may not necessarily be a direct money flow Exhibit 10 describes each money flow category
Loan officer receives a graduated percentage of the illustrated in Exhibit 9.
rate sheet spread
“All in” price to the lender includes SRP and If we look at a simple example of a $200,000 loan, we get
Secondary Market Premium a clear picture of how money flows between players in the
Net secondary marketing income for the lender is “All market. A borrower applies and is accepted for a
in” minus rate sheet spread $200,000 loan with either a retail loan officer or
Secondary Market Premium amount could be a wholesale loan broker. The borrower pays an origination
gain or a loss for the Lender fee of 0.5%-1% or $1000-2000 at closing to the mortgage
Warehouse spread is the net interest spread between lender. The borrower also pays fees of varying amounts
loan rate and the interest paid on a warehouse line of to lender services providers for appraisals, credit reports,
credit etc. The loan is temporarily funded by the mortgage
Interest payments are passed on by the Investor to lender with a warehouse line of credit from a warehouse
owners of MBS's bank. The difference in the interest rate given to the
borrower and the rate at which the money is borrowed,
PMI only applies when certain loan to value (LTV)
the warehouse spread, yields the mortgage lender as
parameters are not met
much as 0.3% of the value of the loan, or $600 for this
Investors include one or more of the following example (Source: 2004 MBA Cost Study).
Private conduits
Savings and Loans (Thrifts)
GSE's (Fannie, Freddie)
Other Mortgage Banks
Investment Banks
Exhibit 10: Description of Dollar Flow among Mortgage Participants

Category Description

Origination Fees Fees paid by the borrower to the Loan Officer/Broker during the origination process,
these are typically included in the closing costs.
Rate sheet spread The amount that the lender agrees to pay the Loan Officer/Broker by product type.

Closing cost fees
Interest payment (borrower to
lender)
Monthly interest payments
(borrower to investor via servicer)
Warehouse Spread
Service Release Premium (SRP)
Secondary Market Premium
Servicing Fees
Source: Trinity Partners
Fees paid by the borrower to the Lender Service Provider including Appraisal fees, Title
& Escrow etc.
Upon loan closing, interest is accrued daily. The borrower pays the lender the principal
plus interest until the Lender sells the loan to an Investor.
Borrower makes the monthly principal and interest payment to the servicer. Payment
also includes taxes and insurance amounts, held in escrow by the servicer.
Warehouse spread or yield spread premium is the difference between the rate charged
by the warehouse bank to the lender and the rate that the lender is charging the customer
for their mortgage. In most cases, this results in a net gain for the lender.
The fee paid by either an investor or a servicer to the lender for the future rights to
service a loan.
The premium an investor pays a lender to acquire a loan in the secondary market.
Several factors determine the value of the premium, including product type and risk
profile. Sometimes loans are sold at a discount and the lender loses money on the
transaction.
The fee paid by the loan investor to the servicer for performing loan administrative
duties.

12
 The Residential Mortgage Banking Market in the US

After a loan is closed, the mortgage lender pays a rate
sheet spread, or commission to the retail loan officer or
wholesale broker of 0.75-1%, or $1500-2000 in our
example. Then the loan is sold on the secondary market
to an investor for as much as 2.5% above its funded value,
or a $5000 premium. This 2.5% is made up of the service
release premium and the secondary market premium.
Typically, when an investor buys a loan, they credit the
funds (loan amount and premium) to the lender's account
at the warehouse bank. Investors buy loans of varying
risk, duration and product type in order to package them
as mortgage-backed securities, debt instruments offered
in the securities market. Pension funds, insurance
companies, hedge funds and other institutional investors
purchase these mortgage-backed securities that yield
interest over the life of the security.
The investor also has a choice of either servicing the loan
or paying someone else to service it for a fee. Servicing
fees, paid by an investor to a servicing company, typically
range between 0.25% and 0.5% of the outstanding loan
balance per year. The borrower makes all future payments
either to an investor who has retained the servicing rights
or to a servicer who services the loan on behalf of an
investor and forwards the payments on to that investor.
The escrow portions of the payment are forwarded by the
servicer on to the various final recipients, including
mortgage insurance companies, homeowner's insurance
companies, and local tax authorities.
Mortgage Processing Economics
Loan Production
From the loan production perspective, there are six high-
level sets of activities that take place within the lender's
purview from sourcing to secondary marketing. Those
activities, and the processes aligned with them are
provided in Exhibit 11. (Note that the processes listed are
of a high level. There is a significant set of details that
have been omitted for simplicity's sake.)
From a cost perspective, this end-to-end processing of a
single loan costs the lender an average of $1505 (Source:
2004 MBA Cost Study). This cost number includes all
activities and overhead involved in the loan production
process, including fees for services that are outsourced to
lender services providers. The detailed average costs for
loan production, per loan, are illustrated in Exhibit 12.
With relatively high process and overhead costs on a per
loan basis, mortgage lenders have several sources of
revenue to recoup their expenses and turn a profit.
Origination fees (28% of lender revenue per loan on
average) that the borrower pays to the lender at the
time of closing that go toward covering the overhead
and process costs associated with originating a loan
- usually charged to the borrower between 0.75% and
1% of the loan value. The average origination fees in
2003 were $765 per loan (Source: 2004 MBA Cost

Exhibit 11: Process Chain in Loan Production

Processing Shipping
Loan Warehouse Secondary
Activities and Loan Closing and
Sourcing Management Marketing
Underwriting Post Closing

Primary Marketing Loan File Setup Document Shipping Line of Credit Coordination
Preparation Management
Loan Application Loan Processing Purchase Clearing Loan Sales
Underwriting Loan Funding Documentation Pipeline
Key Compliance Post Closing Management
Processes Management
Post -
Pricing Underwriting Document Funds
Pricing
Recording Disbursement
Hedging

Risk Management and Quality Control

Domain
Services
Customer Service

Source: Trinity Partners

13
 Sector Report: BPO

Exhibit 12: 2003 Production Cost Average per Loan premium, a significant percentage of their overall
revenue. While impressive profits can be made by
Other Direct relying on these two sources of revenue, in order to
Expenses, $625 Personnel, $779 further increase margins, efficiencies and cost reductions
must be found in the labor intensive processes of
Retail Loan Origination
Officers, $358
originating a mortgage.

Other Retail Origination Secondary Marketing

Employees, $166
Purchased Production Investors are primarily involved in three high-level
Employees, $135 activities as they buy loans and resell them as securitized
Warehousing and
Marketing Employees, financial instruments. These activities and their
$20
Fringe Benefits, $85
associated processes are outlined in Exhibit 13.
Electronic Data Education and
Occupancy, $73 Training, $3
Processing, $28
Other Personnel Exhibit 13: Process Chain in Secondary Marketing
Expenses, $11

Source: 2004 MBA Cost Study

Purchasing
Resale of
Activities Loan Review and
Loans
Study). It is rare, however that these fees actually Settlement
offset the entire cost of loan production and most
lenders actually lose money in this part of the Document Commitment Securitization
Review Management
process (Source: Mortgage Bankers Association). Key Disposition
Processes Quality Control Funding
Warehouse spread (18% of lender revenue per loan
on average) or yield spread premium which is the Due Diligence
difference between the rate charged by the warehouse Domain
bank to the lender and the rate that the originator is Services Customer Service
charging the customer for their loan. While this
Source: Trinity Partners
difference is often very small in terms of percentage,
the high loan volumes and large credit lines of
originators can yield a significant source of income.
Net warehousing income averaged $516 per loan in In terms of costs, a typical investor has three main
2003 (Source: 2004 MBA Cost Study), which expenses.
translates to 0.3% of the total loan value (based on an Loan Process costs for the end-to-end process
average loan value of $170,000). of reviewing, purchasing and securitizing loans.
Net Secondary Market premium (54% of lender Secondary Market Premiums paid to the lender for
revenue per loan on average) includes the gain or loss purchase of each loan, usually between 0.5%-2.5% of
on the sale of loans in the secondary market, pricing the loan value (including Service Release Premiums).
subsidies and overages, service release premiums Loan servicing fees of between 25 and 50 basis
(SRPs) and the capitalized value of servicing rights points of the total annual loan outstanding
(net present value of future servicing cash flows). In principle paid to a servicer for servicing the loan.
2003, net secondary marketing income averaged
$1,528 per loan (Source: 2004 MBA Cost Study). This From a revenue perspective, an investor has two main
averages to 0.9% of total loan value (assuming sources of income.
$170,000 average loan size), consistent with a range Interest income from the loans the investor owns,
of 0.5% to 1.5% of total loan value. paid to them by the borrower, usually through a
servicer or other line of business within their
With an average processing cost of $1,505 per loan and company, if the investor owns and services their own
average fee revenue of only $765 per loan, it is clear that loan portfolio.
lenders often take a loss on the costs of originating a loan. Income from the sale of securities (usually through
In order to make up this loss they must rely on income an investment bank) to institutional investors as debt
from the warehouse spread and secondary market instruments.

14
 The Residential Mortgage Banking Market in the US

Due to the fragmented nature of the market, the extremely Exhibit 15: 2003 Loan Administration Cost Average per Loan
complex and varied products that investors purchase, and
the vast differences in vendor size and technology
platforms, it is difficult to make an estimate of the process Other Expenses, $24 Personnel, $39
costs involved with reviewing and purchasing loans. It is
clear, however, that the processes an investor must Loan
complete represent a subset of the lender’s loan Administration
Employees, $30
production processes. We can therefore assume that the
process cost per loan is less, on the average, than the
Fringe
$1,505 that it costs to originate a loan. Benefits, $7

Loan Administration Loan

Servicers are involved in several activities as they service Administration
Processing, $6
loans from the time of loan production until termination
Other Personnel
through pay-off or foreclosure. These activities and the Electronic Data Occupancy, $5 Expenses, $1
associated processes are listed in Exhibit 14. Processing, $7

Servicers incur process costs associated with servicing a
loan that average $81 per loan, per year (Source: 2004
MBA Cost Study). Exhibit 15 outlines the average
breakdown of these costs on a per loan basis.
To offset these processing costs, servicers have three
main sources of direct income.
Servicing fees of 25 to 50 basis points paid annually
on the outstanding principle of the loan by
investors
Source: 2004 MBA Cost Study
Ancillary fees such as late payments fees, bad check
fees, and prepayment penalties
Float which occurs when payments are received in
advance of when the investor requires remuneration
- the servicer manages this cash on a short-term basis
for potential investment gain

Exhibit 14: Process Chain in Loan Administration

Payment Collections,
Loan File Escrow Customer
Activities Processing & Bankruptcies,
Setup Management Service
Reporting Foreclosures

Automated Payment Hazard Balance Inquires Late Payment

Servicing Accounting Insurance Notices
Key Borrower Setup Statements PMI Accounting Escrow Inquires Early & Late Stage
Processes Collections
Welcome Calls Tax Reporting Property Tax Statement Foreclosure
Accounting Request
Lien Release

Loan Accounting
Domain
Services
Cross-Selling

Source: Trinity Partners

15
 Sector Report: BPO

If servicers also provide other products or services via Exhibit 17: Sample Products Offered By Lender Service
different lines of business, e.g. a full service bank like Providers
Wells Fargo or Washington Mutual, they can leverage the
customer relationship to cross-sell other products e.g. Product Cost Range Fee Range
related services such as insurance, credit cards, Credit - Individual $6 -12 $12-20
checking accounts, or other types of loans are often sold Credit - Joint $10 -15 $12-20
to existing customers.
Flood $8-13 $13-19
Lender Services Appraisal $250-325 $275-350
Lender services includes all of the ancillary activities AVM $15-22 $20-28
attached to the mortgage loan production process, such as Title $550-800 $650-900
flood insurance, appraisal, title insurance, credit, escrow, Escrow $150-250 $200-300
and home owner's insurance. A few of these process areas
also pertain to servicing, but the majority of effort comes Insurance $475-700 $550-800
during the loan production process. The six main areas of Source: Trinity Partners
lender services and the processes associated with them
are outlined in Exhibit 16.
Some notes and assumptions about the above table:
Some mortgage banks have divisions within their various Fees are average ranges, different regions of the
loan production departments that conduct these activities country command different price schedules.
e.g. LandSafe at Countrywide, but many originators pay Refinancings are generally at a lower cost than
outside service providers to deliver these services. The purchases e.g. AVM can be used instead of a full
fees associated with these services are charged back to the appraisal; overall processes are more streamlined.
borrower as part of the origination fee.
Market Size and Growth Trends
Examples of some of the products offered by lender The US residential loan market is the largest debt market
services companies and the corresponding fees and in the world, larger even than the US Treasuries market.
process costs are outlined in Exhibit 17. Currently, there are about $7.6 Trillion in outstanding
residential loans, with a total housing stock value of about
$15 Trillion (Source: Mortgage Bankers Association,
National Mortgage News). There are about 59 Million
loans currently being serviced in the United States. As
represented in Exhibit 18, the mortgage market in the US
is larger than any other mortgage market in the world.
Exhibit 16: Product Domains in Lender Services

Lender Appraisal
Credit Flood Title Escrow Insurance
Services

Credit Report Ordering the Flood Condition Title Research Escrow File Setup Property
Appraisal Investigation Assessments
Key Supplementals Property Flood Certificate Title Examination Document Underwriting
Process Appraisal Issuance Verification
Hazard Insurance
Estimating Market Title Policy Issuance Closing and
Value Disbursements Policy Issuance

Cross Sales and Marketing

Functional
Services Customer Service

Note: Some lender service providers are also offering title re-insurance and home warranty products as additional
sources of revenue.

Source: Trinity Partners

16
 The Residential Mortgage Banking Market in the US

Exhibit 18: Outstanding Mortgage Debt ($ Billion) Exhibit 19: Trend in Mortgage Interest Rates
8000
7000
SPREAD 30 -YEARS FRM 1- YEAR ARM
6000 Percent
10
5000
8
4000
5.40
3000 6

2000 4 3.27

1000 2
0
United 0
United Germany
Kingdom Netherlands France 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
States
Source: EMF, Federal Reserve Source: MBA Weekly Mortgage Applications Survey

The residential mortgage industry is, by its very nature, a
cyclical business in which changes in interest rates by the
Federal Reserve, as well as fluctuations in the Consumer
Price Index (CPI) and the value of US Treasury Bonds all
play a strong role in market dynamics. Exhibit 19 shows
how mortgage rates have been on a declining trend since
the early 1990's.
This decline in rates has fueled much of the growth in the
residential mortgage industry and the industry has
experienced a tremendous refinancing boom. In 2003,
Exhibit 20: Residential Mortgage Origination Volume ($ Billion)
the peak year of the boom, $3.812 Trillion in total loans
were funded (Exhibit 20). Refinancings accounted for
66% of the total volume. 2004 saw a significant cooling
off of the refinancing market as rates swung slightly
upward and the total origination volume was down to
$2.65 Trillion (Source: Mortgage Bankers Association).
The common wisdom for 2005 has been that as rates
continue to rise, volumes are likely to shrink even further
from the 2004 numbers. As this happens, the competition
for market share in a shrinking market is likely to get
fierce.

$4,500

$4,000 $3,812

$3,500
Projected Totals

$3,000 $2,854
$2,650
$2,422
$2,500 $2,243
$2,143

$2,000
$1,656

$1,500 $1,379
$1,139
$1,020
$1,000 $894 $834
$769 $785
$639
$562
$458
$500

$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Mortgage Bankers Association

17
 Sector Report: BPO

In the first quarter of 2005 however, several contrarian stable level in line with economic expectations. While
events were recorded: estimates vary, the broad range of the residential
US construction spending increased for a 13
th
mortgage market is expected to be in the $2.1-2.4 Trillion
consecutive month in February 2005, rising 0.4 range, with purchase market stabilizing around $1.4-1.5
percent from January to increase total spending to a Trillion and refinance market coming down to $0.6-0.9
record annual rate of $1.05 Trillion. Building activity Trillion, from the record level of $2.5 Trillion in 2003
in the first two months of 2005 climbed more than (Source: Mortgage Bankers Association). Exhibit 21
10% from the same period the previous year (Source: shows the downward trend of refinance volumes as a
US Commerce Department) percentage of total originations that started in 2004 with
estimates for 2005, 2006.
Private residential construction, which accounts for
over 50 percent of US construction expenditures, Exhibit 21: Refinance as a Percentage of Total Originations
increased 0.7 percent in February 2005 as rising
mortgage rates helped propel housing demand
70%
(Source: US Commerce Department) 66%
60% 62%
Homeowners with one-year adjustable-rate 57% Project ed
52% 52% Percentages
mortgages are jumping to refinance with longer term 50%
47%
adjustable rates of between 5 and 10 years in order to 44%
40%
hedge against further rate increases. Likewise, 36% 39%
homeowners who are with 5 - 10 year ARMS are 30% 31% 28%
refinancing in fixed mortgages for the same reasons 29% 32%
29%
(Source: USA Today, Wall Street Journal) 20% 23% 21%
15%
Adjustable-rate mortgages accounted for 36.6 percent 10%
of all home loans the week ending March 25th 2005, 0%
marking a 15-year high. More borrowers are flocking 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
to ARMs now that the 30-year mortgage rate has
surpassed 6 percent (Source: Mortgage Bankers Source: Mortgage Bankers Association
Association)
In summary, the Mortgage Bankers Association is
The increase in mortgage rates (which in turn would predicting a decline in both purchase and refinancing
lead to lower volumes) is being offset by such factors volumes in 2005 and 2006, as well as an upward trend in
as an improving economy, a strong jobs market and fixed mortgage rates through 2005 and 2006 as 30-year
healthy household formation. interest rates stabilize around 6-6.5%.

2005 is likely to be the second-best year on record,
with a 3.2% decline in resales to 6.57 Million, and a 4-
percent decline in sales of new homes to 1.15 Million
(Source: National Association of Realtors)
Higher sales volumes and increasing home prices are
being attributed to buyers rushing into the market
before mortgage rates dramatically rise (Source: New
York Times)
This does not imply that the mortgage market is infinite -
eventually, origination volumes will decrease to a more
These trends will have a significant impact on the
participants in the mortgage market, especially lenders, as
they will have to compete more aggressively for market
share, while managing their existing internal cost
structures effectively in light of reduced demand.
Business Trends and Top Priorities in the Mortgage
Ecosystem
The Mortgage ecosystem has been impacted by several
significant trends over the past 18 months:
1. Rising interest rates leading to a reduction
in both refinancing and purchasing volumes
2. Increasing competition for customers

18
 The Residential Mortgage Banking Market in the US
- companies are aggressively pursuing top line
growth through customer acquisition and retention
strategies
3. Demanding borrowers forcing participants to
deliver new products faster
Each of these trends has a strong impact on the business
strategies of the participants in the mortgage ecosystem,
which we analyze in this section.
Rising interest rates
Mortgage banking is a highly cyclical industry, subject to
overall economic fluctuations and interest rate variations.
As shown in Exhibit 20, mortgage origination volumes
are expected to drop from $2.65 Trillion in 2004 to $2.14
Trillion in 2006.
During the refinance period of 2002 - 2003, mortgage
lenders had built up their capacity to process the ever-
increasing volumes (2003 had a record $3.8 Trillion in
origination volume). Lenders are now faced with the need
to either utilize the built-up capacity or shed it to reduce
their fixed cost base. This is leading to two distinct
strategies for lenders:
Reduce overall costs by:
Outsourcing (including Offshore-based
delivery)
Deploying enabling technology platforms
and solutions to reduce dependence on
manpower
Migrate the fixed cost base to a variable one by
partnering with offshore providers that deliver
transaction-based services
Some lenders are seeing this as an opportunity. For
example, a top 20 mortgage lender was physically not
able to process all of the loan production demand in 2003.
This lender is now moving to a variable cost structure by
leveraging offshore delivery of services, where the cost is
on a per transaction basis. This enables the lender to
remain synchronized with the economic fluctuations
inherent in the mortgage industry, both on the up side
(ability to rapidly scale) and the down side (eliminate
dormant infrastructure).
Increasing competition for customers
As the overall market size decreases, competition for
market share will intensify between the players in this
industry. In order to aggressively pursue this shrinking
customer base, lenders will undertake several different
options to remain competitive:
Pass the benefits of cost reduction on to borrowers
Reduce turnaround time for borrowers
Introduce new products to the market
Identify diverse distribution channels nationwide
Volume growth and product expansion will become a
priority for lenders in particular as they become more
geographically diverse and deliver new products to
market.
Demanding borrowers
As rates increase, borrowers are likely to become more
demanding in searching for the optimal product that will
meet their financial requirements. This is likely to have
the following effect on the mortgage participants'
business strategies:
New product development: Mortgage lenders will
have to spend more management time and invest
heavily in new product development to create flexible
structured products for borrowers
Technology enablement: In an industry still largely
operating with paper, mortgage players will have to
focus on leveraging technology to ensure faster and
more efficient processing of loan requests
Development of a 24x7x365 delivery model:
Lenders will have to respond to the market and
enhance customer service by creating a “follow the
sun” model
In summary, given these trends, mortgage players are
increasing their focus on several key areas in order to
remain competitive in the industry:
Cost control has been a top priority as players all
across the industry have attempted to
maintain/increase their margins by squeezing out
cost.
Volume growth and product expansion has been a
priority for lenders in particular as they have had to
become more diversified both geographically and
from a product perspective in order to increase
revenues in a shrinking market.
Quality improvement initiatives have taken on a
role of increased importance across the industry as
players have embraced Six Sigma and other quality
improvement concepts.
19
 Sector Report: BPO

Technology innovation is beginning to play an

important role as it was something that was largely
ignored by most players during the recent refinancing
boom, meaning that systems and solutions are now in
dire need of upgrades and improvements.
Enhanced Customer Service is becoming a key
strategic differentiator as pricing gets squeezed for
both sides (borrowers and lenders) and players are
striving to deliver exceptional services to gain and
retain borrowers: develop customers for life.
Outsourcing and Offshoring have become key
strategic initiatives either as a captive exercise or
through a BPO relationship as industry players have
realized that it allows them to reduce costs, free up
resources for value-added activities, improve quality,
reduce cycle times, and leverage a global delivery
model.

20
 BPO Opportunities in Mortgage Banking
BPO Opportunities in Mortgage Banking
The following section links the Mortgage Banking
ecosystem requirements to BPO services. It delineates the
size of the opportunity, highlights the benefits of
outsourcing, details what mortgage processes are
outsourceable and concludes with a discussion on what
factors to consider before making an outsourcing and
offshoring decision.
Almost every process (or nearly end-to-end) in the
mortgage value chain is outsourceable as demonstrated
by some established players in the US mortgage industry
e.g. PHH (formerly Cendant Mortgage), Nexstar. As
mortgage providers contemplate extending outsourcing
offshore, however, they face several challenges:
1. Core vs. non-core processes - This dilemma, albeit a
common one, is a critical question to answer. Like any
other organization thinking about offshoring,
mortgage providers carry the risk of falling into the
trap of retaining processes that they are good at rather
than retaining processes that they should be good at.
In other words, should mortgage providers identify a
defensible position in the mortgage process value-
chain, develop/enhance the requirements to focus on
one or more particular niches and develop
competitive advantages, as many do from a product
and distribution perspective, or continue to perform
business as usual and see their position erode? Exhibit
22 illustrates how we define the Mortgage Process
Value Chain.
Exhibit 22: Mortgage Process Value Chain
Product
Securitization Procurement
Development
Create capital Secure investor Design and Market
funds pool via commitments to develop mortgage mortgage loan
MBS offerings purchase loans loan products for products to
to GSE’s for in secondary the primary distribution
investment in market market partners and
secondary end customers
market
Source: Trinity Partners
2. Technology Penetration Levels - Investments in
innovative and progressive technology platforms and
applications have not been at the forefront of
mortgage lenders' agendas. Many technology budgets
today opt towards maintaining existing applications
or purchasing point solutions that hinder a lender's
ability to successfully compete. For example, a lack of
an imaging and workflow platform prevents a typical
mid-size mortgage lender from scaling their business
and extending their processes offshore. The challenge
becomes more severe when mortgage lenders are
unable to find a partner that can provide them
integrated solutions blending process consulting,
technology enablement and offshore service delivery.
3. Domain Knowledge Gap - The mortgage industry is
heavily regulated and interconnected, and as such
requires higher than average domain knowledge to
execute many front-office and back-office processes.
For example, loan production requires in-depth
domain knowledge of multiple mortgage products
(especially in today's competitive environment), an
understanding of economic indicators affecting
borrower trends and familiarity with regulatory
requirements such as GLBA. It becomes quite a
challenge for a lender to leverage the offshoring
opportunities to their fullest potential if partners do
not have the required level of domain knowledge.
4. Regulatory Pressures - The regulatory environment
in the mortgage ecosystem is comprehensive and in
some cases may inhibit a mortgage bank's ability to
migrate and execute certain processes outside of the
US. Even if a process can be easily offshored, the
levels of disclosure and compliance add pressures
Wholesale Retail
Marketing Processing Servicing
Distribution Distribution
Transact Secure end Process and Provide ongoing
mortgage loan customers for deliver customer
products with mortgage loan mortgage loan service and
retail products products to end processing of
distributors customers in mortgage loan
primary market cash flows
and investors in
secondary
market
21

(and overhead) to both the bank as well as the offshore
partner. The majority of the top tier and domain-
specific offshore vendors are in compliance with all
leading legislation affecting the mortgage industry
such as the Graham-Leach-Bliley Privacy Act
(GLBA) and the Sarbanes-Oxley Act.
To gain a foothold in the mortgage ecosystem, the second
generation offshore service providers must address all of
these challenges. Embracing the domain knowledge gap
as well as the technology enablement challenges becomes
an imperative for any service provider who is seeking to
develop long-term offshoring relationships with players
in the mortgage ecosystem. Furthermore, without the
right skills, in-depth business consulting knowledge and
offshoring discipline, very few offshore service providers
will be able to help mortgage banks address the core
versus non-core process migration issue. The last
challenge can best be addressed only if the offshore
service provider embraces a robust internal compliance
environment and has a high level of awareness regarding
the regulations which affect day-to-day mortgage
processing.
Size of the Outsourcing Market in Residential
Mortgage Banking
Labor costs remain a significant portion of the overall
costs that mortgage banks incur in both origination and
servicing. For lenders in particular, these costs have
hovered slightly above 50% of the total direct origination
costs per loan for the past few years (Source: 2004 MBA
Cost Study). Thus, BPO providers that can significantly
reduce this resource cost base have a huge potential
market to pursue. Let us a look at a few market size
estimates to understand the potential size of the
addressable mortgage BPO market in the United States.
In 2005, it is estimated that 10.5 Million residential
Exhibit 23: Addressable BPO Market Size for Loan Production and Administration
Average Process Estimated
Segment Cost per Loan 2005
Volume
Loan Production $1505 10.5 Million $15.8 Billion
loans originated
Loan $81 59 Million
Administration loans serviced
Total
Source: Trinity Partners, Avendus, Mortgage Bankers Association, National Mortgage News
22
Sector Report: BPO
mortgages will be originated in the United States. With
the average cost of originating a mortgage at $1505,
lenders will spend $15.8 Billion in origination processing
costs in 2005. If somewhere between 50 and 70% of the
processes in origination are offshorable and if the
offshore providers can save their customers 30-50%
overall, then the addressable market for offshore
origination processing alone is around $5.7 Billion.
Using the same methodology for loan administration, we
will assume an average of 59 Million loans serviced per
year at an average process cost of $81 per loan. Note that
the cost per loan will be higher for smaller mortgage
banks that do not have the scale of the larger players (e.g.
Washington Mutual, Wells Fargo), one of the reasons
why larger servicers can maintain the profitability of their
servicing portfolio. The $4.8 Billion spent per year by
servicers translates to roughly $1.7 Billion of addressable
revenue for offshore providers.
For the purposes of this analysis, a thumbnail sketch of
the market opportunity in the two largest segments of the
mortgage ecosystem give a sense of the addressable
market size in mortgage processing.
It is a fairly complex endeavor to estimate the market
opportunity in the secondary marketing space. The
market fragmentation coupled with widely varying
technology platforms and purchasing requirements that
differ greatly by product type make it difficult to
determine an average, all-in process cost for the
secondary market. Similarly, for lender services, the
highly regional fragmentation (i.e. at the county level)
and the varying technology platforms combined with the
different cost bases for refinancings versus purchases
make estimating an average process cost out of this
report's scope.
Offshore
Total Percentage Provider's Average
Process of Offshorable Share Addressable
Cost Processes of Spend Market Size
50-70% 50-70% $5.7 Billion
$4.8 Billion 50-70% 50-70% $1.7 Billion
$7.4 Billion
 BPO Opportunities in Mortgage Banking
Having noted these facts, it can be assumed that the
addressable BPO markets for secondary marketing and
lender services are smaller, yet not insignificant, in
comparison with the BPO markets for loan production
and loan administration.
The calculations for loan production and loan
administration, based on expected volumes and average
process costs, are outlined in Exhibit 23.
Assumptions for this analysis:
These numbers represent the addressable market size
for BPO providers
Not all mortgage processes are offshorable
We assume that between 50 and 70% of all
processes are offshorable
100% of the volume of offshorable processes can be
executed offshore
Savings of 30-50% will be achieved by offshoring.
Given this, the offshoring provider's share of the spend
is 50-70% of the total process cost
Average loan size of $204,000 (Source: National
Mortgage News)
Estimated 2005 origination volume $2.14 Trillion
(Source: Mortgage Bankers Association)
Estimated number of loans originated in 2005 is 10.5
Million (based on the previous two assumptions)
There is an average of 59 Million loans in the servicing
portfolios of mortgage banks
Average cost to originate a loan is $1505 (Source:
2004 MBA Cost Study)
Average cost to service a loan is $81 (Source: 2004
MBA Cost Study)
The percentage of this market that is currently being
capitalized on is more difficult to estimate, however. The
market size in India in the mortgage processing market
(including both residential and commercial markets) is a
small percentage of the total addressable market size.
Using a bottom-up analysis, we believe the mortgage
processing market in India is currently a $150 Million
market that employs 7,500 people. Thus, there is
significant room for growth in this relatively nascent
market that will continue to mature over the coming years.
We believe that by 2010, the mortgage processing BPO
market in India will be $1.1 Billion, which implies a
50%+ CAGR for the next five years.
Benefits of Offshoring Processes
The decision to offshore a portion of one's business
processes brings with it more than just the potential for
cost savings. Other factors that add to the strategic value
of the decision are often overlooked and overshadowed
by the direct bottom line impact, but they are no less
important to the value proposition and potential growth
trajectory. When all of these factors are considered
together, the true value of an offshore partnership is
apparent:
Reduce costs of operations (both fixed and variable)
Preserve capital for strategic uses
Leverage lower cost offshore labor
Create strategic competency by reacting to market
changes with flexibility that hedges against
downward fluctuations yet positions companies to
take advantage of upward movement.
Manage capacity to maximize on market
opportunities and resolve competitive threats.
Realize true cost flexibility by engaging in
transaction-based or hybrid pricing models. This
pay-per-use model is a natural hedge against
downward fluctuations in volume and it also
positions the business for upward movement when
transaction levels pick up.
Enable focus on core competencies by redeploying
skilled and knowledgeable resources to focus on
customer-facing and value-added roles, leading to
additional opportunities for revenue.
Improve management focus
Enhance capability building by accessing world-
class skills
Develop new products and distribution strategies
Enhance productivity and reduce cycle times by
partnering with expert providers.
Accelerate time to market for the development and
deployment of both IT and BPO solutions by
leveraging a 24X7 workforce.
Improve and monitor quality with measurable
process outputs and business outcomes
All of these factors have a material business impact and
can help players in the mortgage banking industry
improve their overall quality, productivity and
profitability. Companies that look to offshoring strictly
for cost savings often find that quality and value
23
 Sector Report: BPO

quickly become important determinants for maintaining
a sustained presence or partnership abroad.
Cost Savings from Offshore Outsourcing
The benefits of offshoring are not only cost-based. The
outsourcing cost structures, however, warrant a separate
discussion as there is increasing pressure on players in the
mortgage banking industry to reduce operational costs
and correspondingly improve their margins. Developing
an outsourcing strategy is no longer a matter of just when
or who to partner with, rather it has become a question of
where and how to partner. A well-rounded outsourcing
strategy must consider the cost benefits of looking to
secondary and tertiary onshore locations, as well as
offshore locations that can provide even lower cost
structures.
Furthermore, analysis must be done around what type of
sourcing model should be executed, e.g. captive, joint-
venture, traditional BPO etc. These decisions will impact
the cost structure associated with completing a particular
process or set of processes.
Having noted these factors, let us take an example of a
loan production process role and analyze the cost impact
on an FTE basis of different sourcing strategies. As noted
above, labor costs make up more than 50% of the total
cost for processing a loan on the average.
As an example in Loan Production (see Exhibit 24),
consider an educated processor who is working on fairly
high level processes that require domain knowledge. It is
our estimate that in the United States, the fully loaded
cost, which includes salary and overhead (taxes, benefits,
office rent, equipment depreciation,
telecommunications, recruiting, training, and
management overhead) for such a resource is between
$3,300 and $4,000 per month in a captive, onshore
model. The variance in this number depends on a number
of cost factors, most importantly geographical
differences in salary and overhead, all other things (i.e.
skills) being equal.
To outsource this work to an onshore provider, a
mortgage bank would expect to pay about 15-20% less,
or between $2,850 and $2,300 per month per FTE. When
outsourcing this work to an offshore provider, the per
month FTE cost base falls to between $1,850 and $2,550,
depending on the skillsets required. Furthermore, FTE
savings is only one factor when developing a business
case for offshoring a process. Other factors may include:
initial decreases in productivity due to training, cost
(fixed and variable) of IT enablement and connectivity
and migration costs.

Exhibit 24: Cost Savings in Loan Production Due to Outsourcing & Offshoring

Loan Production FTE Cost Savings

Onshore Offshore
Cost Item In-House
Provider Provider
Salary $2300-2850
Taxes and Insurance $425-525
Occupancy $200
All - in Cost: All - in Cost:
Hardware and Software Depreciation $35 $2600 - 3100 $1650 - 2250
Telecom $40
Administrative and HR Overhead $50
Management Overhead - Onsite $250-300
Management Overhead - Outsourced Process N/A $150-200 $200-300
Cost Range $3300-4000 $2750-3300 $1850-2550
Cost Savings Percentage N/A 10-20% 30-50%

Note: This is a generic model and actual savings will vary based on specific case
Source: Trinity Partners, Avendus Advisors
24
 BPO Opportunities in Mortgage Banking

Exhibit 25: Cost Savings in Loan Administration Due to Offshoring & Outsourcing

Loan Administration FTE Cost Savings

Onshore Offshore
Cost Item In-House
Provider Provider
Salary $2100-2500
Taxes and Insurance $375-450
Occupancy $200
All - in Cost: All - in Cost:
Hardware and Software Depreciation $35 $2500 - 2600 $1450 - 2000
Telecom $40
Administrative and HR Overhead $50
Management Overhead - Onsite $250-300
Management Overhead - Outsourced Process N/A $150-200 $200-300
Cost Range $3050-3575 $2650-2800 $1650-2300
Cost Savings Percentage N/A 10-20% 30-50%

Note: This is a generic model and actual savings will vary based on specific case
Source: Trinity Partners, Avendus Advisors

A similar example is provided in Exhibit 25 for Loan plotted against relative Process Complexity to answer this
Administration. It is important to note that the cost question. Each of these two categories is defined as having
savings gained by offshoring loan administration one or more of the attributes described in Exhibit 26.
processes tend to increase with more complex and high
value processes. This example pertains to lower end Exhibit 26: Evaluation Criteria to Determine Offshorable
processes in the loan administration domain such as Processes
welcome calls.
Category Attributes
It is essential to keep in mind that these savings estimates Value • Cost savings
do not presume any process or technology improvements • Productivity enhancements
due to offshore-based delivery. They only reflect the • Faster turn around times
benefits accrued from offshore outsourcing due to • Improved quality
arbitrage of labor cost and direct costs, in a steady state. • Focus on core competencies
• Intelligent capacity
management
Thus, while onshore outsourcing may save a mortgage • Enable growth
bank anywhere between 10% - 20% on a portion of a • Invest capital strategically
particular process, those savings climb up to 50% when • Enhance capability building
leveraging an offshore model. Note that the offshore - provide access to diverse skills
savings narrow to between 30-40% if the offshore
location is captive. Furthermore, the lead times for setting Process Complexity • Skill availability
up captive operations as well as migrating processes is • Domain expertise requirement
20-30% higher than in the case of a third-party provider. • Migration complexity
• Management in a distributed
Offshorable Processes environment
• Risk factor
What processes are offshorable in the Mortgage Banking • Ability to improve the process
ecosystem? We take the approach of qualifying the via technology enablement &
various processes across the constituents with Value process optimization
gained by the customer when offshoring the process Source: Trinity Partners

25
 Sector Report: BPO

Based on this simple logic, we can group a representative
sample of the various processes in the ecosystem in one of
four quadrants, as illustrated in Exhibit 27.
Exhibit 27: Sample Offshorable Processes
High
workforce. We believe that while pure cost arbitrage is the
starting point of leveraging an offshore partnership, it is
technology improvements and process improvements,
combined with a higher quality of service, which will

Highest Value Creation Long Term Development

Loan Production Loan Production
• Loan setup & processing • Underwriting
• Loan data verification • Virtual loan officer
• Purchase advice processing • Rate lock - loan pricing
Loan Administration Loan Administration
• Early stage collections • Late stage collections
• Late payment notices Secondary Marketing
• Tax accounting/reporting • Underwriting/purchase review
Secondary Marketing • Customer service
• Due diligence data extraction Lender Services
• Investor accounting • Abstract creation
Lender Services
• Title examination
• Credit report
Value

Test the Waters Save for Later

Loan Production Loan Production
• Loan data entry • Hedging
• Document indexing • Pipeline management
• Post-closing document follow-up Loan Administration
Loan Administration • Foreclosure
• Welcome calls
Secondary Marketing
• Borrower setup
• Hedging
Secondary Marketing
• Document indexing Lender Services
• Investor delivery • Insurance underwriting
Lender Services
• Title policy creation
• Appraisal audit

Low Process Complexity High

Note: Some processes that are outsourceable are not necessarily conducive to being offshored
Source: Trinity Partners

Another question that usually faces the mortgage create competitive advantage for the mortgage
participant is how to incorporate potential changes in participants.
process and technology, while leveraging an offshore

26
 BPO Opportunities in Mortgage Banking

What Processes are Currently Outsourced?
With a multitude of BPO providers and no shortage of
mortgage banking customers, it is no surprise that many
of the processes in the end-to-end life of a mortgage loan
are already being outsourced on a regular basis. In
onshore models, the entire end-to-end production process
is outsourced to a number of providers e.g. PHH, Nexstar.
Loan administration is another common set of services
that is outsourced onshore, with mortgage banks and
pure-play servicing companies providing these process
functions for investors who own the servicing rights to
purchased loans.
Multiple pre-underwriting, post-closing and loan
administration processes are delivered from offshore
locations today, however, there are a few instances of end-
to-end delivery of services in this model. Another set of
processes that is outsourced to onshore and offshore
providers is lead generation, where mortgage banks or
brokers pay for warm and cold leads from lead generators
who source these leads either online, via telemarketing, or
through direct mail campaigns.
In recent years, more and more processes have been
migrated offshore, as the skills have become more readily
available and the technology infrastructure has matured
to enable global distributed processing. In captive centers
Exhibit 28: Key Factors to Consider in an Offshore Strategy
or joint ventures, several larger mortgage banks have
offshored servicing processes such as early stage default,
escrow administration, loan collections and new loan
administration set-up. In loan production, processes such
as appraisal first-level review, employment verification,
post-closing first-run legal review, and data validation
have been moved offshore. Also, some functions
associated with underwriting and funding are being
performed in offshore captive centers. For mid-tier
originators and servicers, BPO partnerships have been
forged to deliver many of these same functions through
non-captive BPO providers. Most commonly, processes
like due diligence, document indexing, data validation,
electronic stacking and shipping of loan documents, and
call center functions (both for loan administration and for
lead generation) have been done through BPO
partnerships. As offshore skills continue to improve and
mortgage banks become more comfortable with the
concepts and risks of offshore BPO, processes higher and
higher on the value chain will increasingly be performed
in non-captive arrangements.
Factors to Consider before Offshoring
There are several key factors to consider when deciding
whether or not to move processes offshore, including
strategic, financial, operational and risk management
criteria. Addressing these areas will help frame a
thorough and comprehensive offshore strategy. Exhibit
28 outlines these factors.

Factors Description
Description
Strategic = Analyze how offshoring will complement growth and diversification strategies
= Define how offshoring will enhance the competitive positioning
= Identify and mitigate internal resistance that may be encountered in implementing an offshore
strategy
= Delineate the communication strategy towards employees as well as customers
= Understand how customers will perceive the shift to an offshore model
Financial = Define the business case for offshoring - initial investment requirements, total cost of ownership

= Determine level of control over offshored processes

Operational = Baseline the processes in order to accurately measure quality and productivity
= Build in-house expertise to manage the offshore vendor relationship
= Ensure partner has disciplined migration methodology

= Identify the key regulatory issues to address

= Determine impact of offshoring on internal skills and capabilities
Risk Management = Research how the company's brand will be impacted by offshoring
= Define the compliance and security requirements for distributed offshore processing

Source : Trinity Partners

27
 Sector Report: BPO

The above criteria will also help drive the development of
the optimal offshore model - captive (in-house), build,
operate and transfer (BOT) or fully outsourced. Exhibit
29 describes some of the more common offshore models.
The delivery partner of the first four models can either be
and can accelerate the cost savings and benefits, or
whether to partner with a global brand that may have the
necessary horizontal delivery capabilities but will take
time to learn their business. Exhibit 30 provides a
summary of the pros and cons.

Exhibit 29: Offshore Delivery Models

Offshore Model Description

Traditional = End-to-end or sub-component of a business process is transitioned and executed in the offshore
Outsourcing delivery center
= Optimal model for non-core business processes; core processes entrusted to domain-specific BPO
provider
= Partner has full execution responsibilities
= Client monitors the processes through metrics review and dashboards

Build, Operate = Partner sets up the remote offshore center from initiation through to process delivery
and Transfer (BOT) = Leverage the partner's relationships and intellectual capital to recruit staff, acquire and setup
facilities, build the infrastructure, manage vendors and deal with regulatory issues
= Ownership and management responsibilities are transferred to the customer after a pre-defined
period
= BOT ensures process integrity and diffuses inherent build-out and migration risks to enable the
client to achieve the creation of a captive center

Assisted Build Out = Works well for clients that require assistance with specific processes associated with captive
operations
= Services include acquiring and setting up facilities, entering a foreign market, build out of the
global delivery infrastructure, recruiting and training

Joint Venture = Partner and the client create a joint venture that will service the client's business
= Client provides knowledge of the existing business function while partner provides the local
expertise and service skills
= The JV may also deliver services to other entities, enabling the client to acquire an additional
revenue stream

Captive = Client builds the offshore processing center in-house with its own resources
= Client recruits, hires and trains all individuals responsible for managing the offshore center and
delivering services
= Thorough familiarity with the local culture and regulatory environment is required to maximize
offshore center efficiency
= Realized cost savings are less than other offshore models due to high investment in infrastructure,

Source: Trinity Partners

a best of breed partner or a large-scale global brand

organization. As participants in the residential mortgage
market in the US evaluate offshore-based delivery
models, they must decide whether they require a vertical,
domain-specific partner that understands their business

28
 BPO Opportunities in Mortgage Banking

Exhibit 30: Benefits & Risks of Different Offshore exceed industry standards are the most desirable long-
Delivery Models term partners and tend to have the most success in
delivering value and quality to their clients.
Model Benefits Potential Risk
Some of the most important characteristics to consider
Outsource to Domain knowledge, Scalability when evaluating a prospective offshore partner are
offshore best- lowest cost base outlined below.
of-breed vendor among all options

Domain expertise that allows the vendor to rapidly

Outsource to a Cost base lower than Lack of domain define customized outsourcing solutions, achieving
Global Brand the captive option, knowledge leading gains in quality, productivity and revenue generation
ability to leverage to longer migration as well as cost savings. A vendor with the right
global delivery model times; inability
domain expertise will also be able to plan for the
to deliver end-to-end
processing long term with a client by factoring in industry trends,
discovering growth opportunities in the market and
Captive Domain knowledge, Higher cost than
keeping abreast of the client's unique financial needs
ownership of all other offshore- and business challenges.
operations leads based delivery Ability to deliver solutions that lead to rapid ROI,
to greater comfort models, risk of with an equal focus on quality and productivity that
managing business will enhance the client's competitive position. The
in a new geography delivery model must focus on people, process,
can take away focus
from core business technology and knowledge in order to be most
successful and must offer the clients hybrid solutions
Source: Trinity Partners that leverage innovative technology, domain specific
knowledge and process optimization techniques, all
We believe that large players in the US mortgage wrapped into an offshore model.
ecosystem will leverage hybrid (combination of captive
Rigorous migration methodologies are a critical
and outsourcing) models for offshore delivery, while
component of the partner's delivery capabilities.
mid-tier to smaller players will gravitate towards the
Rapid transition times are achieved if the partner
outsourced model.
understands the clients business, which in turn leads to
a faster ROI.
All of the above considerations must be addressed by Technology enablement of BPO processes must be
senior management as they develop a strategic offshore an integral component of the offshore partner's
move. Without proper analysis of these issues, a foray offering. It is not just about infrastructure, but
into offshoring is likely to be painful, more costly and run enterprise application development to enable business
a greater risk of failure. An accomplished offshore process optimization, transitioning and managing the
partner will have the necessary domain expertise, tools offshore processes.
and methodologies available to guide potential
Measurement and analytical capabilities are in the
customers through this decision process and to assist
DNA of the offshore partner. Outputs and outcomes
them in determining the optimal partnership model.
should be measured throughout the engagement
lifecycle. Visibility should be enabled to multiple
Keys to a Successful Partnership constituents through the use of integrated platforms,
Numerous factors should be considered by companies data marts and dashboards to enable close monitoring
when developing partnerships with offshore vendors. of Service Level Agreements (SLAs). Finally, ensure
Cost savings are only the first requirement in finding and that what is being measured and analyzed is directly
partnering with an offshore provider, while a myriad of linked to the business strategy.
other benefits and qualities must also be closely Continuous process optimization which enables
examined in the vendor search process. Vendors who can clients to continually strive for operational excellence
provide skilled resources, process optimization, and efficiency. For example, six - sigma discipline
technology enablement and domain knowledge that should be a component of the partner's methodologies
and skill sets.

29
 Sector Report: BPO

Resource scalability that allows for a rapid ramp-up

of highly trained, skilled resources capable of
delivering on business solutions. Well developed
resource training and retention programs are
important for maintaining and creating a
scalable resource model.
Scalable infrastructure in support of rapidly and
effectively delivering solutions at the highest quality
levels. Connectivity between the client and the BPO
partner is of utmost importance for ensuring minimal
downtime and zero interruption in client-facing
business processes.
Compliance with regulatory requirements (e.g.
Graham-Leach-Bliley, Sarbanes-Oxley) and
Security of customer data are rigorously adhered to.
Customer privacy, records retention, audit
requirements, virtual and physical security exceed
industry standards and conform to best practices.
Management team experience in delivering
industry-specific solutions and maintaining and
fostering long-term partnerships. The management
team is responsive to client needs and flexible enough
to partner creatively with their customers.
Program management disciplines that ensure the
proper governance, relationship management and
oversight of the offshore partnership.

30
 State of the Mortgage Outsourcing Market
State of the Mortgage Outsourcing Market
This section discusses the key players in the mortgage
outsourcing market, illustrates trends in the industry and
concludes with a case study of a top 20 mortgage lender
that has embraced offshoring as part of its growth
strategy.
Nature of the Market and Key Players
The mortgage BPO landscape of providers is a large,
fragmented market, with numerous players of varying
sizes competing from different entry points to win client
relationships. It is instructive to think about the BPO
market from both the onshore and offshore perspective,
as this distinction highlights the differences in players
that offer products and solutions in this market, as well as
the relative maturity of their offerings.
Onshore Market
From an onshore perspective, outsourcing has been
around for many years in the mortgage industry. The
typical players in this market offer private label solutions
and leverage economies of scale to drive transaction costs
Exhibit 31: Sample Players in the Onshore Mortgage Outsourcing Market
Lead Generation Loan Processing
Lendingtree.com Nexstar
Lowermybils.com PHH (Cendant)
Private list brokers Netbank (RBMG)
Source: Trinity Partners
down and create efficiencies for their clients. Their
product offerings are mature and fairly standardized as
they focus on lead generation, servicing functions and
loan production processes such as pre-underwriting data
entry and post-closing processes. While their offerings
are mature and they have adequate domain expertise,
their cost structures are only so flexible, given their
onshore resource and overhead costs. Thus, they are
often unable to offer significant cost savings for their
partners over the long-term, at least relative to the cost
savings that are achievable by moving processes
offshore. The key advantages to partnering with these
providers are their knowledge of the mortgage industry
and their ability to handle large transactional volumes.
The primary types of providers that exist in the onshore
market include lead generation specialists (both online
and offline), non-bank private label outsourcing
providers and private-label loan administrators and full-
service mortgage banks that provide loan administration
functions for investors on a fee basis or other BPO
functions for smaller originators. A sample of companies
in each space is provided in Exhibit 31.
Offshore Market
The offshore market for mortgage BPO has more recently
become a viable place for US - based mortgage banking
companies to pursue long-term partnerships. While IT
outsourcing (and more recently contact centers) has had a
more lengthy history offshore, the offshore BPO market
as a whole is relatively nascent. While many onshore
outsourcing relationships have been successful, the clear
advantages of labor arbitrage have led to a rapid
expansion of the offshore market in recent years.
Secondary Market
Loan Administration Underwriting
Dovenmuehle Clayton
Cenlar FSB Lydian Data Services
Wells Fargo
Several distinct types of players have entered the market
from multiple entry points. Not surprisingly, the large
offshore IT providers have begun to offer BPO solutions
packaged along with, or even separate from, their IT
work. These players have a long history of delivering
customized IT solutions to US-based financial services
companies and mortgage banks. Strictly from a name
recognition and size perspective, they will remain strong
players in the BPO market in the years to come.
Similarly, the large US-centered system integration firms
and their global BPO practices are leveraging offshore
31
 Sector Report: BPO

processing centers to deliver BPO to their clients. Their
brand recognition and penetration with financial services
companies bodes well for their forays in mortgage
banking BPO. Exhibit 32 provides an illustration of this
stratification and the multiple entry points into the BPO
arena. We have provided examples of companies that
have entered the BPO space at the multiple entry points.
Exhibit 32: Entry Point into BPO Market
companies serve a multitude of industries while
providing both horizontal and vertical process solutions.
More recently, a few companies have come to market that
are purpose-built for the mortgage banking and financial
services verticals and that are able to leverage offshore
operations to provide their solutions. They have a deep
amount of domain expertise in the mortgage industry and
are able to offer solutions that are higher up the process
value chain for their clients, thus delivering even more
cost savings, more rapid returns and better quality.

Exhibit 34 shows the profiles of key third party vendors in

Niche High
eValueserve
Vertical
India focusing on the mortgage processing market.
Trinity Partners, High Volume
EXL, Ocwen Vertical
Another trend that should be mentioned in the offshore
IBM Daksh, 24/7
market is the propensity of large mortgage banks to build
Customer,
-
out captive centers for offshore processing, thus
Generic BPO Services Degree of Focus
Wipro-Spectramind mitigating some of the risks associated with a partnership
model (Note that per a Boston Consulting Group study,
Sourcecorp the typical break-even point for a captive center is
Bulk Processes
between 300 to 400 seats). A few of these banks have
Infosys, TCS IT Services
grown their operations large enough to offer their
Low
services to other mortgage banks as BPO providers.
Source: Trinity Partners
As can be seen, the outsourcing market in the mortgage
ecosystem is currently being serviced by both focused
The definition and examples of each category is BPO players and the broad-based outsourcing
provided in Exhibit 33. companies. We believe the players who can deliver strong
domain knowledge, combined with a solution delivery
Exhibit 33: Example of Different Categories of BPO Players

Category Domain Process Examples

Knowledge Complexity

Niche Vertical Very High High Analytics, Credit Risk Management

High Volume Vertical High Moderate Mortgage Loan Production, Loan Administration,
Secondary Marketing
Generic BPO Services Low Moderate Contact Center, Finance & Accounting, Human Resources
Bulk Processes Low - Moderate Low Credit Card processing, Stock trade processing, Check processing
IT Services Low Low Application Development, Maintenance & Support

Source: Forrester Research, Trinity Partners

In the last few years, a few pure-play offshore BPO model wrapped around technology and process
providers have also come into the market and have started improvements will become market leaders in this
selling solutions to mortgage banks. Many of these pure- industry.
play providers entered the market as horizontal business
function providers and have slowly developed vertical
solutions for certain industries. Typically, these

32
 State of the Mortgage Outsourcing Market

Exhibit 34: Representative Set of Third Party Mortgage BPO Players in India

BPO Provider Description Location Employees Investors

Adventity BPO player focused on mortgage, Mumbai 400+ NA
research and analytics and airlines industry
EMR BPO player focused on financial services Gurgaon NA IL&FS Ventures
and healthcare industries
EXL BPO and Call Center player focused on Noida, Pune 6,000+ Oak Ventures, FT
financial services Ventures
Global Realty BPO player focused on commercial Chennai 575+ Capital Trust, Actis,
Outsourcing mortgage Wachovia Securities,
Citigroup Alternative
Investments
iFlex IT Solutions and BPO player focused Mumbai, 4,200+ Public
(Acquired on financial services Gurgaon
Equinox)
iGate IT Solutions and BPO player Bangalore 5,500+ Public
Indecomm BPO player focused on mortgage and retail Bangalore 800+ Westbridge Capital,
and banking domains Acer Ventures
Inuva BPO player focused on mortgage Kolkata 100+ NA
Progeon Broad-based BPO player Bangalore 3,500+ Owned by Infosys and
Citibank Private
Equity
Trinity Partners BPO player focused on mortgage Gurgaon 350+ NA
Wipro BPM IT Solutions and BPO player Bangalore 10,000+ Public
Zenta BPO player focused on mortgage and Mumbai 3,000+ Intrepid Capital and
collections Hiranandani Group

Source: Trinity Partners, Avendus Advisors

Trends in the Mortgage BPO Market
The mortgage BPO market has changed significantly in
the past few years as more and more players, both
customers and providers, have entered. Even more
importantly, the level of sophistication in the BPO
relationships that have been forged has increased. More
and more processes have been successfully executed both
onshore and offshore. Offshore opportunities have
become particularly more attractive as communication
technology has improved, offshore resource skills have
increased and pure-play BPO providers have begun to
offer vertical, industry-specific solutions. All of these
trends have allowed US mortgage companies to take
advantage of the tremendous offshore labor arbitrage and
reap the benefits of better quality, quicker turnaround
times, accelerated time to market and increased customer
service.
The new vertical BPO pure-plays have realized that the
market is trending toward more customized, hybrid
solutions that are purpose-built for vertical industries and
that combine people, process and technology to deliver
better results and lasting partnerships. High quality BPO
demands more than a “body shop” approach of throwing
hundreds of lower cost resources at a process. Industry
specific solutions and programs will dominate the BPO
offerings of the future as the market continues to
consolidate and sharpen its focus. While scale remains
important for vendor longevity and rapid solution
delivery, the resources that produce that scale must be
highly educated, properly trained and retained for longer
periods of time in order to provide the most possible value
to a partnership.

33

In summary, the key offshoring trends that are driving the
mortgage ecosystem include:
1. Offshore as a destination is already being tested by
early adopters e.g. IndyMac.
2. Mortgage players will succeed primarily by
partnering with vertically-focused BPO
providers that are able to integrate process
optimization and technology enablement with their
delivery capabilities.
3. Cost benefits are achieved early, however, the real
benefits will come with the long-term
commitment to offshore where the ability to
manage capacity, focus on core competencies,
invest capital for strategic purposes and improve
quality and productivity of services will lead to a
sustainable competitive advantage.
4. There are many large, established offshore
providers that are looking to enter vertical service
domains, however, there are only a handful of
companies that have the required domain
expertise to successfully deliver consistent results
and quality services.
5. The availability of diverse skills and technology
advances enable most mortgage processes to be
delivered from an offshore location; the offshore
provider must have knowledge of the business to
maximize the benefits and reduce the inherent
risks.
Case Study of an Offshore Outsourcing Relationship
The following case study illustrates how a top 20 US
Mortgage Lender partnered with a vertical domain BPO
solution provider to develop and execute a strategic
roadmap that integrated an offshoring strategy into the
overall company strategy by extending its services
offshore.
The partnership began by identifying high-impact, low
risk processes that could be easily offshored and that
could provide immediate results. Once the relationship
had been established and the partnership had
demonstrated tangible outcomes, the lender and the
provider jointly developed a long-term offshore strategy
that was driven by the lender's overall business strategy of
growth, product diversification and strategic capital
investment.
The Business Drivers
The Mortgage Lender had been extremely successful
during the refinancing boom in 2002 and 2003. They had
done so by taking advantage of sophisticated technology
platforms, an aggressive distribution strategy and by
providing an innovative set of products to its growing
34
Sector Report: BPO
customer base. In spite of the success, however, the
lender was still not able to fully capitalize on the
opportunities due to constraints in processing capacity.
Furthermore, they were embarking on a diversification
strategy - launching new mortgage products (e.g. sub-
prime), adding more distribution channels (e.g. Net
branches), and looking to enter different lines of business
(e.g. retail banking) in order to smooth earnings. They did
not want to invest heavily in fixed costs, however, as they
were looking to preserve the capital for long-term
strategic and short-term tactical execution purposes.
The lender knew their strategic and tactical imperatives
could be facilitated through offshoring, but wanted to
“test the waters” by deploying low-risk processes that
could deliver fast, tangible results.
Phase 1: Short-term deployment: low-risk, high impact
Exhibit 35: Case Study, Phase 1 Requirements
Requirement Description & Results
Immediate need to • Looked at pure technology
deploy an indexing solutions (e.g. bar-code, OCR), but
and electronic loan deployment timeframes were too
document delivery long, quality was not to the
solution to meet
standards of the lender and solutions
investor (secondary
were too complex
market) and internal
line of business • Evaluated onshore providers, but
demands they were too costly and weren't
flexible enough to create a
customized solution
• Deployed a hybrid loan document
indexing solution that leverages
people (intelligent eyeballs),
process (continuous optimization)
and proprietary but extensible
technology platforms (efficiency)
• Leveraged the partner's disciplined
migration methodology that
applied strict discipline and metrics
to the identification, mapping,
migration and execution of
processes offshore, all the while
ensuring seamless extensibility of
the lender's organization
Source : Trinity Partners
 State of the Mortgage Outsourcing Market

The results from the deployment of the loan document The benefits were extended to the newly offshored
indexing solution were almost immediate: processes, including rapid deployment of services, a more
Exhibit 36: Case Study, Phase 1 Benefits

Benefits Description

Reduced risks and costs
• Reduced retrieval costs and associated processing time by as much as 50%
• Enabled automated legal and risk-management audits on higher volume of loan
packages
• Minimized physical warehouse storage and retrieval (shipping) costs
• Accelerated loan sales and funded warehouse lines of credit for new loan production

Increased productivity and efficiency
• Loan documents were compiled and shipped more quickly - at the stroke of a key -
satisfying the requirements of diverse investors
• Managed the scale of the operations in line with market fluctuations, hedging
against a downturn yet positioning it for growth
• Knowledgeable resources were redeployed to higher-value, customer facing tasks

• Increased service quality for brokers, branches, borrowers and investors - the right
Improved quality of services documents are now being sent the first time
• Achieved faster response times and fewer errors in customer queries

Source : Trinity Partners

As the efficiencies and benefits from the indexing
solution began to have a tangible impact on operations,
the lender proceeded to offshore other high-impact
processes, including purchase advice/settlement
reconciliation, post-closing document follow-up and
loan audits at multiple points in the origination lifecycle.
extensible and seamless back-office, higher quality of
services and reduced costs.
Based on these results, the lender proceeded to determine
how they could seamlessly integrate BPO and offshoring
into their overall business strategy.

Phase 2: Offshore as an enabler of the long-term strategy

Exhibit 37: Case Study, Phase 2 Requirements

Requirements Description & Results

Develop an offshoring • Developed the offshoring business case, linked to the firm's business strategy
strategy that enables • Created the deployment roadmap with associated Critical Success Factors
the lender's long-term
strategy. This was • Prioritized list of offshorable processes, to be executed over an 18 month period
achieved by holding • Defined the primary drivers by executives and LOB management
facilitated boardroom- • Improved Management Focus
level sessions (i.e. with
• Convert capital to expense
the executive
management team • Handle capacity fluctuations
including CEO, COO, • Each entity focuses on unique expertise and operational efficiency
CFO and CTO) with • Lay the strategic foundation for growth
clear and concise
objectives, leveraging • Identified a set of secondary drivers to further prioritize the offshorable processes
the partner's structured • Access to technology skills and resources
methodology and • Centralization and standardization
approach.
• Access to superior service levels and turn around times

35
 Sector Report: BPO

Exhibit 37: Case Study, Phase 2 Requirements

Requirements Description & Results

• Lower labor costs

• Increased discipline and transparency
• Increased revenue potential/opportunities
• Developed the Governance model that spanned all levels of the organization, spearheaded
by a Program Management Office
• Created the Change Management and Corporate Communication plan
• Identified the key stakeholders within each business unit and performed force field
analysis, i.e. identified the supporters, who was neutral and the resistors
• Executive management team formulated the communication plan for all stakeholders
and incorporated the key issues into the plan, e.g. Employee Training, redeployment to
value-add positions, opportunities for growth, etc.
• Proactively engaged resisting forces within the organization by aligning their roles and
goals
• Set targets and milestones for achievement of strategic offshoring goals at multiple
levels
• Customized the transition and migration management
• Incorporated the resource recruiting and training into the transition process, to ensure
that the offshore team hired the right base skills and enhanced them with focused training.
For the more complex processes, the lender made the trip to India to oversee the hiring and
training programs
• Created a virtual organization - partner linked with needs of the lender business units e.g.
hiring and training requirements for domain expertise such as underwriters
• Promoted executive and management visibility by creating reporting dashboards via a
dedicated business intelligence platform accessible by multiple levels of the organization,
updated in near real-time that is linked to process and business metrics

Source : Trinity Partners

The Extent of Offshoring Benefits Achieved

The lender has fully embraced offshore outsourcing as a
strategic growth lever and has begun to outsource a not
insignificant portion of its operations. They are now
utilizing offshore processes throughout their loan
lifecycle as illustrated by the Exhibit 38.
Exhibit 38: Case Study, Sample Processes Outsourced to Third Party
The offshoring partnership has delivered significant
long-term, strategic benefits for the lender:
Extended the organization strategically, enabling it to
pursue aggressive growth targets through improved

Closing & Loan Document Risk

Loan Origination Loan Processing Post Closing
Funding Management Management

Pricing Post-Underwriting Pre-Shipping Data Loan Document Loan Fraud

HUD1 Follow-up
Quotes & Locks Processing Entry Indexing Verification

Pre-Underwriting Purchase Loan Trailing Document

Processing Reconciliation Follow-up

Source : Trinity Partners

36
 State of the Mortgage Outsourcing Market

capacity management; offshoring is now the enabler
of the growth strategy
Enhanced the competitive position by reinvesting the
saved capital for strategic purposes
Allowed focus to develop strategic and core
competencies
Provided access to world class resources enabling
capability building - leverage the best resources for the
specialized service
A representative sample of processes and associated
benefits is illustrated in Exhibit 39.

Exhibit 39: Case Study, Processes Offshored and Benefits Achieved

Benefits
Activity Offshored Processes Accelerated Revenues Improved Quality Decreased Costs
Loan Document Indexing Faster sale of loans New process with >99% 30 to 50% reduction
Indexing due to overall decrease accuracy in handling costs for
in processing time loan queries
Pricing Locks, Quotes, Ability to handle Reduction in broker and 50% reduction in
Changes higher loan throughput branch call hold times resource labor cost
Processing Pre-Underwriting & Ability to move loans High accuracy 50% reduction in
Post-Underwriting to Underwriting and (>98-99%) resource labor costs
Processing Closing more rapidly
Pre-Shipping Insurance Data Entry Faster sale of loans, Improved accuracy (98%) Reduction in loan
Processing and EDI Data increasing early inventory
Validation delivery premiums
Improved First-time 50% reduction in
Fundable ratio resource costs
Improved investor Reduction in future
relations based on auditing costs based
high quality files on high quality files
Purchase Loans Purchase Advice Identification of Improved accuracy 50% reduction in
Reconciliation Analysis & Data Entry investor underpayments (>99%) resource labor costs
Post Closing - Final HUD1 and Faster sale of loans Reduced backlog of Avoided penalties and
Document Retrieval Trailing Docs Retrieval increasing early thousands of trailing fines from investors
delivery premiums mail documents for missing documents
50% reduction in
resource costs
Risk Management - Borrower SSN N/A New process >98% 50% reduction in
Loan Fraud Verification accuracy resource labor costs
Detection
Improved investor Reduction in
relations based on high repurchased loans
quality files

Source : Trinity Partners

37
 Sector Report: BPO

Mortgage Banking BPO Activity in India Today Exhibit 40: Examples of Captive BPO Operations in
India in Mortgage Banking
It is critical to understand the degree of progress already
Number of
made by participants in the US residential mortgage
Customer Location Employees
market to leverage offshore delivery models, especially (Overall)
in India. Exhibits 40 and 41 show examples of BPO
operations by US mortgage banks in India from both a Countrywide Mumbai 700+
captive and third party perspective. Bank Of America Hyderabad,
Mumbai 700+
ABN AMRO Mumbai,
Chennai 2,500+
HSBC Bangalore, 4,000+
Mumbai,
Hyderabad
Citibank Mumbai, Chennai 7,000+
Ocwen Mumbai,
Bangalore 2,500+

Source: Avendus Advisors

Exhibit 41: Examples of Third Party BPO Operations in India in Mortgage Banking

Customer Vendor Sample Processes Delivered From India

GreenPoint Mortgage Progeon and iGate Rate-lock verification, verification of employment, post-closing first
-run legal review, data validation, new loan administration setup, call
center, escrow administration
IndyMac Bank EXL Welcome calls to new borrowers, loan collections, customer service
First Magnus Trinity Partners Loan document indexing, post-closing document follow-up, loan set
-up and processing

Source: Avendus Advisors

38
 Conclusion
CONCLUSION
Having analyzed the landscape of the offshore BPO
opportunities in the US residential mortgage
ecosystem, we believe this market presents a strong
potential for offshore-based delivery of processing
services.
With companies like Countrywide Financial, IndyMac
Bank, Greenpoint Mortgage and CitiMortgage leading
the way, we believe more players in the US residential
mortgage market will look to leverage offshore
capabilities in general, sourcing them from India in
particular.
While the large players are more likely to choose a
captive delivery model, the mid-sized firms will look to
outsource to established BPO service providers in India
specializing in the vertical mortgage domain.
We believe that a wide array of processes in Loan
Production, Loan Administration, Secondary Marketing
and Lender Services will move offshore as companies
seek cost advantages and other long-term strategic
benefits such as intelligent capacity management in line
with market fluctuations, enhanced productivity and
more efficient operations.
Finally, we believe existing BPO service providers who
do not have vertically focused mortgage capabilities will
look to acquire domain-focused BPO players, while
private equity funds and venture capital firms will look to
invest in such vertically focused companies with strong
management teams, healthy balance sheets and scalable
operations in order to leverage the potential growth in this
market.
39
 Sector Report: BPO

APPENDIX 1: OVERVIEW OF THE INDIAN BPO MARKET

Indian ITES-BPO continues to grow from year to year, Exhibit 43: Revenue Productivity in Indian BPO Industry
witnessing high levels of activity both onshore as well as (Annual Revenue in $ per Employee)
offshore. Continuing pressure on cost bases at a time of
growing competitiveness is driving companies to look at
offshore outsourcing as a strategic alternative. Access to 14305 14063
global talent, economies of scale, process engineering 13208
and enhancements, wage arbitrage, increased profit 11111 11429
margins and improvements in quality are some of the
gains that companies have realized from offshore
outsourcing.

Market Size and Growth

The Indian BPO market is a $5.1 Billion market which

has grown at a scorching pace of 55% CAGR over the 2000 2001 2002 2003 2004
past 5 years. The market currently employs 347,000
people. With strong capital inflow and customer traction, Source: Avendus Advisors
the BPO space has gained critical mass with large,
established players emerging across several domains. The United States remains the key market, accounting for
over two-thirds of the total ITES-BPO exports from India.
Exhibit 42 shows the growth of the Indian BPO industry. Western Europe, primarily the UK, accounts for
approximately 20 percent.
Exhibit 42: Growth of Indian BPO Industry
Growth Segments in the Indian BPO Market
6000 400
347 The BPO market in India has grown across all segments,
5000
350 with the single largest driver of growth being customer
245 300 interaction activities. Exhibit 44 shows the segment-wise
4000
250
contribution to the Indian BPO market.
171
3000 200
5100
106 150 Exhibit 44: Segment-wise Breakup of Indian BPO Market (2004)
2000 3600
70 100
45 2350
1000
1495 50
565 930 Content
0 0 Development
2000 2001 2002 2003 2004 2005 15%

Revenue (US$ Million) Employees (In '000)

Customer Care
Administration 33%
Source: NASSCOM and Avendus Advisors 15%

Payment Services
Interestingly, the BPO market in India has experienced an 12% HR
Finance
increase in revenue productivity, as companies gain in 23%
2%
their delivery sophistication and process expertise.
Exhibit 43 shows the growth in revenue productivity in
the Indian BPO market Source: NASSCOM and Avendus Advisors

40
 Appendix 1: Overview of the Indian BPO Market

The growth in the BPO market has been across a wide range of segments and a wide variety of activities as shown in
Exhibit 45.

Exhibit 45: Services across Segments in Indian BPO Market

Customer Finance & Human Financial Insurance Utilities Healthcare Airlines

Interaction Accounting Resources services
Database Billing Administration Tax Application Customer Medical Airlines
Marketing Services Processing Processing service Billing Data
Services
Customer Accounting Education & Asset Underwriting CIS and Claims Revenue
Analytics Transactions Training Management billing Adjudication Accounting

Tax Consulting Recruiting & Payment Claims Meter reading Member Frequent
Telemarketing & Compliance Staffing Processing Adjudication and related Management Flier
services Services Program
Risk Payroll Loan Member
Management Services Processing Management Revenue
Services Recovery
Financial Hiring Mortgage
Reporting & Administration Processing
Analysis
Records Research
Management Outsourcing

E-Learning

Source: Avendus Advisors

Participants in the BPO Market Customer Segments

The growth in the BPO market is being driven by three Customers across various industries are beginning to
categories of players leverage India extensively for their BPO operations as
shown in Exhibit 46 (based on data from the top 14 third
Captive BPO Players: BPO companies owned by the party BPO players in India).
client, servicing only the parent company e.g. E-serve
owned by Citibank.
Exhibit 46: Revenue Breakup in Indian BPO Market
MNC BPO Players: BPO subsidiaries of global across Domains
outsourcing majors, e.g. Accenture's BPO centers in
Mumbai and Bangalore.
Third Party BPO Players: BPO companies owned Telecom
by Indian IT Services companies or independent third 19%
party BPO players, e.g. Spectramind owned by Wipro, BFSI
Others
37%
WNS Global Services. 4%

Airlines & Travel

Unlike the Indian IT Services market, where third party 9%
players account for the majority of the market share, in the
BPO space, the captive and MNC players account for 65-
Publishing & Technology
70% of the market. Media 11% Retail 13%
7%

Source: BPO Orbit

41
 Sector Report: BPO

Exhibit 47 provides a representative set of vendors and

customers in each of the sub-segments of the BPO market
in India.
Exhibit 47: Representative Set of Vendors and Customers

Customer Finance & Human Financial

Particulars Accounting Resources Insurance Utilities Healthcare Airlines
Interaction Services
Players Daksh OPI Secova EXL ICICI Zensar Perot Systems WNS
Onesource
Msource Compass Hewitt Trinity Transworks Medusind Kale
WNS Consultants
Wipro Core3 ICICI Nittany
Onesource EXL
Epicenter Intellinet
Efunds HTMT
24/7Customer
GECIS
GECIS
Customer Dell Ford Philips Citibank Willis BP Aethena British
Airways
Providian World Bank HP JP Morgan Axa Chevron US based
Taxaco billing Lufthansa
Amazon Oracle Orbitech GE Aetna companies
P&O Austrian Air
Sprint Oracle ABN Aviva Nedlloyd Cigna
AMRO Qatar
AmEx Unilever BUPA Airways
HSBC
Fedex P&G Humana
Standard
Chartered

Source: Avendus Advisors

Key Success Factors for BPO Players in India
Exhibit 48: Critical Success Factors for BPO Players in With an increasingly competitive situation among third
India party BPO players, companies are focusing on several
key success factors, which will enable them to capture the
market leader position in their target segments. Exhibit 48
shows the critical success factors for BPO players.
Domain Knowledge
High quality
and Process
management team
Different categories of third-party BPO players require
Expertise different pieces of these four factors as they scale up their
business as shown in Exhibit 49.

CSFs to become an Exhibit 49: Areas of focus

Outsourcing major
Category of Player Areas Of Focus
Large generic BPO player • Domain knowledge in
new areas
Strong balance sheet Access to large BPO arms of IT Services • Domain knowledge in
to provide comfort to customers at CxO Companies new areas
customers levels
Niche BPO players • Strengthen balance sheet
• Access to large customers
Source: Avendus Advisors Source: Avendus Advisors

42
 Appendix 1: Overview of the Indian BPO Market

Emerging Trends in the BPO Market
The key emerging trends in the BPO market are as
follows:
Market continues to show rapid growth and is
expected to sustain 55-60%+ CAGR over the next 3-5
years
Captives continue to dominate market share, however
we believe GECIS kinds of transactions will happen
more regularly over the next 2-3 years
Scale has become key to growth, as the top 10
companies have grown faster than the smaller players
Customers are more risk averse and less willing to
educate new entrants, hence having a proven skill base
and scale leads to success
Capital flow continues for good companies, as there
are more investors than transactions in the market
M&A within India is a key tool to build skill sets; most
large IT and BPO players are looking to create niche
capabilities
M&A in target client markets (e.g. US and UK) is
becoming common as companies try to gain new skill
sets and scale
Near-shore capability acquisition and other offshore
locations are becoming priority for companies leading
to M&A interest in Ireland, Canada, Philippines
etc. from Indian companies
Capital markets are becoming an interesting option for
growing companies, both in the US and India e.g. EXL
and Allsec
Companies are looking to move to "vertical"
focused structures
Capital Infusion into the BPO Market in India
For an industry that is only 8 years old (the first “BPO”
operation was set up in 1997), the BPO market has seen
very strong interest from institutional investors including
private equity funds, buy out funds, venture capital firms
and now increasingly the capital markets in the United
States and India. We estimate that in 2004, the BPO
market in India saw over $700 Million being invested by
these institutional investors. Some of the key investments
are shown in Exhibit 50.
The trends for transactions by institutional financial
investors will be towards the following:
Back large stories in established markets (e.g.
captives, contact centers, content etc.)
Back strong management team driven businesses in
niche areas with high growth potential
M&A Transactions in the BPO Market in India
For an industry which is only eight years old, the velocity
of consummating M&A transactions has been
phenomenal. According to industry estimates, there have
been 16 M&A transactions executed since January 2004
in the BPO space in India. This number could have been
much more if the breadth of the BPO industry was larger,
as strong buyers like AT&T, Convergys and HP continue
to look for acquisitions. Players continue to use M&A as a
strategic tool in the BPO space to acquire clients, domain
and process expertise.

Exhibit 50: PE Transactions since January 2004 in the Indian BPO Space

Investor Investee Timing Funding ($ Million)

1 Cargill Ventures OPI Global Dec 2004 4
2 Technology Crossover EXL Service Dec 2004 10
Ventures
3 GAP/ Oak Hill GECIS Nov 2004 500
4 Carlyle Newgen Imaging Oct 2004 10
5 Temasek / WestBridge ICICI Source Sep 2004 35
6 Westbridge Capital STI Knowledge Jul 2004 6
7 Francisco Partners Office Tiger Jun 2004 50
8 Oak Cap Sutherland Feb 2004 30
9 IL&FS Venture Datamatics Jan 2004 3
Source: Avendus Advisors

43
 Sector Report: BPO

Exhibit 51: Analysis of M&A Transactions since January Exhibit 53: Acquisition of Indian BPO Players by Indian
2004 in the Indian BPO Space BPO Companies since January 2004

I-to-G, 5 G-to-I, 5 Acquirer Target Timing

ICICI OneSource RevIT Mar 2004
Brigade Webhelp, Hyd. Dec 2004
i-Flex Equinox Dec 2004
CRISIL iRevna Oct 2004
ICICI OneSource Pipal Research Sep 2004
I-to-I, 6 Medusind SRF Infotel Jan 2004
G-to-I: Global Companies acquiring BPO Companies in India
I-to-I: Indian BPO Companies acquiring BPO Companies in India Source: Avendus Advisors
I-to-G: Indian Companies acquiring BPO Companies overseas
Source: Avendus Advisors
Acquisition by Indian Players of Global BPO
The nature of these M&A deals has been very balanced as Companies
shown in Exhibit 51.
The Indian players have been very aggressive in looking
Acquisition by Global Players of Indian BPO out and acquiring companies in the US with a
Companies management team that understands a particular domain
and is able to sell outsourcing services in that particular
Global players have acquired BPO companies in India as
domain. Additionally, the Indian companies look for a
an entry strategy into the market as a delivery center.
referenceable client base from the acquisition which
could enable them to sell more of such services to their
existing relationships in the domain.
Exhibit 52: Acquisition by Global Players of Indian BPO
Companies since January 2004
We believe M&A will continue to be used as a strategic
Acquirer Target Timing tool by BPO players in the coming years.

SPI Tech KGMT Mar 2005 Exhibit 54: Acquisition by Indian Players of Global BPO
STI Knowledge Symphony Data Feb 2005 Companies since January 2004

Spheris Avicis/HealthScribe Dec 2004 Acquirer Target Timing

IBM Daksh Apr 2004
Hinduja TMT Source One Oct 2004
HealthScribe HealthScribe India Jan 2004
OfficeTiger Devonshire Group Oct 2004
Source: Avendus Advisors ICICI OneSource ASG Oct 2004
Scandent Cambridge Integrated Oct 2004
Acquisition by Indian Players of Indian BPO
Companies Secova EmpactEBS Sep 2004
Source: Avendus Advisors
The Indian companies have used M&A as a strategy to
either make an entry into the BPO space or consolidate Conclusion
their market share in a particular domain or service area.
For instance, while i-Flex and CRISIL have made The BPO market in India has come a long way since its
acquisitions to enter into the Outsourcing space, the inception and has gained the confidence of customers to
acquisition of Webhelp, Hyderabad by Brigade and the outsource large contracts in complex processes. With
acquisition of SRF Infotel by Medusind were more of a good availability of capital and growing capabilities of
move to consolidate market share in the contact center the companies in the market, the BPO market is poised to
and healthcare outsourcing spaces, respectively. continue on its rapid growth path.

44
 Appendix 2: List of Abbreviations

APPENDIX 2: LIST OF ABBREVIATIONS

AVM Automated Valuation Model

CPI Consumer Price Index
CAGR Compound Annual Growth Rate
FHA Federal Housing Administration
GLBA Graham Leach Bliley Privacy Act
GSE Government Sponsored Entity
HELOC Home Equity Line of Credit
ITES Information Technology Enabled Services
LOB Line of Business
LIBOR London Inter-Bank Offered Rate
MBA Mortgage Bankers Association
MBS Mortgage Backed Security
PMI Private Mortgage Insurance
RHS Rural Housing Service
SRP Service Release Premium
VA Loans Veteran's Administration Loans

45
 About Avendus Advisors
Avendus is a full service investment bank focused on IT
Services, IT Enabled Services & Technology and high
growth areas like FMCG, Pharmaceuticals and Media. Our
team is pooled from leading investment banks and IT
companies. Our services include M&A advisory, private
equity syndication and debt syndication.
Avendus has been funded by Infinity Venture fund and
angel investors from Europe and Silicon Valley. Avendus
has leveraged on these relationships to create its own
network of investors and global technology companies
which can be tapped for clients. Currently Avendus has
over 100 clients across the US, UK, Singapore and India.

Avendus currently employs 25+ professionals who have The recent deals closed by Avendus include:
worked with organizations like, ICICI, Hinduja Finance,
CEA, Goldman Sachs, I-flex solutions, Cognizant and
Infosys.

SO T Asia
Infrastructure
BANK Fund

has acquired R

has been
acquired by , has been
Hyderabad
acquired by
SM

World-Wide Partnerships. World-Class Solutions

Advisor Sole Advisor

Advisor Advisor
March 2005 December 2004 November 2004 September 2004

Healthcare Services

has been
acquired by has been
has been IP and account has been acquired
acquired by
acquired by Buyout by

Medusind Solutions

Kale
Sole Advisor Sole Advisor Sole Advisor Sole Advisor
September
August 2004 March 2004 February 2004
2004

Kale

Term Loan/ has been

Corporate Loan has acquired
Working Capital acquired by Structured Debt

ECONOMATTERS
Independent
Sole Advisor Sole Advisor Valuation
January 2004 December 2003 Advisor Sole Advisor Sole Advisor
December 2003 October 2003 October 2003

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About Trinity Partners Inc.
Trinity Partners is a U.S.-based provider of process and Performance Delivery: Cost savings are, of course, a
technology-enabled solutions to financial institutions that major objective of outsourcing. But Trinity focuses
enable them to reduce their costs of operations while with equal intensity on the quality and productivity that
improving the quality and productivity of their services. will enhance our client's competitive position. Our
global, scalable, seamless infrastructure enables us to
Based in Tucson, Arizona, Trinity Partners delivers its deliver truly world-class services.
offshore services through its 100% subsidiary Trinity
Business Process Management Pvt. Ltd. based out of To ensure that we do just that, we rigorously measure
Gurgaon (NCR Delhi), India. process performance, pre- and post-Trinity. We've
developed unique benchmarks, methodologies,
Our solutions are categorized into two broad areas:
platforms, and SLAs that span the entire business
process and IT delivery spectrum, enabling continual
Business Process Outsourcing (BPO) services
measurement and improvement of the offshoring
targeted at specific verticals (e.g., Mortgage Banking)
process.
and horizontals (e.g., Document Management)
domains, and
Strategic Extension: Trinity seeks long-term
Information Technology delivery services that include
partnerships with clients who see offshoring as an
technical design, application development, and
integral part of their competitiveness and view us as a
maintenance of point solutions and enterprise end-to-
strategic extension of their organization. Trinity's
end solutions
services and solutions allow our clients to focus
resources on delivering their core services to existing
Our Value Proposition
customers and acquiring new customers.
Trinity Partners was purpose-built to service the financial
services industry. We have been able to clearly distinguish
Culture: Trinity Partners prides itself on its culture.
ourselves from the pure play call center and generic
The qualities we value - teamwork, integrity, respect,
transaction processing servicers that comprise the majority
partnership, excellence, leadership, and innovation -
of the current BPO market.
have been the key to our disciplined and organic
growth. And we value the same qualities in our clients.
We enable our clients to extend current capabilities and
build additional services by providing global access to
Benefits to our clients
resources and diverse skills, including best practices in the
Trinity Partners delivers measurable long-term benefits to
domains of process and technology. Our value proposition,
its clients, which we rigorously monitor and quantify.
a result of our methodical focus and execution capabilities,
Depending on the type of processes outsourced and how
can be summarized as follows:
the information technology team is extended, the benefits
illustrated below are attained at various points in the
Domain Expertise: Trinity's in-depth knowledge of
partnership:
both financial services and outsourcing disciplines
allows us to quickly create intelligently customized
Reduction in the fixed and variable costs of operations
BPO solutions, producing not only significant cost
by up to 50%
savings, but major gains in quality, productivity, and
Extension of the organization to hedge against negative
revenue. Our domain expertise also enables us to plan
market fluctuations, at the same time enabling it to take
long-term, factoring in trends in the industry, growth
advantage of positive economic upturns
opportunities, offshore opportunities, and our clients'
Redeployment of skilled and knowledgeable staff to
financial requirements.
customer-facing and value-added roles, such as new
product development, resulting in improved quality of
Solution Delivery: Trinity's strategy combines our
services and additional sources of revenue
four pillars - people, process, technology, and
Increased productivity of the organization people and
knowledge - to create cost-effective hybrid solutions.
processes
We leverage proven frameworks to create vertical and
Accelerates the time to market for the development and
horizontal solutions tailored to our clients' needs,
deployment of IT solutions
combining innovative technology platforms, domain
Enables 24x7 operations
knowledge, process optimization, and the savings made
possible by an offshore model.

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48
Avendus Advisors Private Limited Trinity Partners Inc.

Mumbai India
IL&FS Financial Center 4th Floor, Palm Court
West Quadrant, 2nd Floor Sukhrali Chowk
Bandra Kurla Complex Opposite Sector - 14
Bandra (East), Mumbai 400 051 Gurgaon 122 001
Tel: (+91) 22 5648 0050 Tel: (+91) 124 5018670-72
Fax: (+91) 22 5648 0040

Bangalore USA
B-320 5255 East Williams Circle
Carlton Towers Suite 1025
Airport Road Tucson, AZ 85711
Bangalore 560 017 Tel: +1-520-202-2007
India Fax: +1-520-202-2008
Tel: (+91) 80-5115-0000
Fax : (+91) 80-5115-1111

This report should not be construed as an offer to sell or the solicitation of an offer to buy any security
in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action
based on this material. Recipients of this report should conduct their own investigation and analysis
including that of the information provided. The information contained in this report is based on the
information available with the company. Wherever information is sourced from a public source, the
same has been quoted. The advice/recommendations rendered in this report is merely
recommendatory in nature and not binding. Any decision or action taken by the recipient based on this
report shall be solely and entirely at the risk of the recipient. Opinions expressed are our current
opinions as of the date appearing on this material only.

No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii)
redistributed without prior written consent of Avendus and Trinity.

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