Last one and half years saw an increasing spate of acquisitions in the mortgage services space.  During the last quarter of 2005 Indian BPO companies including Office Tiger, i-Flex, Adventity and WNS (NYSE:WNS) acquired US based mortgage service providers  - Mortgage Ramp, Equinox, Texan Mortgage and Trinity Partners respectively.

In the second half of 2006, Genpact acquired MoneyLine Lending Services while Indecomm Global Services acquired Mortgage Dynamics, both providers of end-to-end mortgage services.
Acquiring companies with strong domain presence in mortgage outsourcing in the US is an effective way of building capability and on site presence to cater to the growing mortgage BPO opportunity.

The Offshoring Opportunity
The outsourcing opportunity in the mortgage industry is pegged at over $30 billion. The global mortgage BPO market is currently pegged at $10-11 billion and a Nelson Hall report on the industry forecasts the global mortgage BPO market to double in size over the next five years to reach $22 billion by 2010.

National Association of Software and Service Companies (Nasscom) estimates the share of the market addressable through offshore service delivery to range between $3-7 billion. Realizing the tremendous offshore potential, there was a sense of urgency amongst Indian vendors towards building expertise and acquiring some client relationships - and the acquisition of US-based mortgage BPOs is the quickest way to achieve this.

The Apparent Rationale
While some players acquired for vertical (service) spread, others did it for geographical spread. For example, while multi-service providers such as Genpact, OfficeTiger and WNS are driven by the need to broaden their range of services, specialized players such as Adventity and Indecomm have acquired to gain market access.

Most of these acquisitions started taking place in the late 2005 till the end of 2006. The period of acquisitions coincided with the slump in the financial services industry in the US in general and the mortgage financing market in particular. Moreover, from the valuations perspective, the US firms in the mortgage sector were being valued less than half their revenues. This made the American mortgage-servicing firms attractive buys for the Indian BPOs that wanted to get a foothold in the US market. Also, these acquisitions provide higher-end skill-sets to the Indian vendors, who can now look at taking on more complex work such as underwriting.
 
Indian Vendor Space
Outsourcing vendors providing mortgage services from India comprises a mix of captive and third party players. Some of the prominent captives in the space include such names as Bank of America, ABN Amro, Citi Group, HSBC, Countrywide Financial, Lehman Brothers and Ocwen Financials. Wells Fargo also announced plans to start its captive operations in India to handle among others mortgage back office services. The third party service providers include EXL, WNS, Wipro, Firstsource, Infosys BPO, Adventity, Genpact, Zenta, Transworks and Office Tiger.

Services Getting Matured
With the growing maturity of the vendors, the services that are being offshored in the mortgage offshoring space are rising up the value chain. Moving from merely offering specific and discrete services such as loan generation, collections, loan origination, vendors like Equinox and iSeva are now positioning themselves as end-to-end providers, and over time all the major players will be making a similar pitch.

Going Forward
Mortgage process offshoring will gain further momentum as the offshore vendors mature. However finding the right skill sets for complex tasks will emerge as a major challenge. Going forward, overseas acquisitions by Indian vendors will continue though it may take on a different hue. The targets are likely to become more diverse, including smaller companies with high levels of specialization, not only in the US but possibly also in Canada, Latin America or Europe.

ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

No responsibility is accepted for errors of fact or opinion. Neither the analyst nor ValueNotes has a position in the stocks covered above, or has received any payment in any form for this report. ValueNotes does not own or trade in the stocks of companies under coverage. ValueNotes does not provide investment banking services or investor relations' services to preserve the independence of its research. Neither ValueNotes nor the analyst incurs any liability arising out of use of the above information/ report. Reproduction in whole or in part without written permission is prohibited.

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