US mortgage crisis may lead to offshoring boom (India)

[OhioChick]

March 14, 2007 02:26 IST

Raman Roy, perhaps India's best-known BPO entrepreneur, is keenly tracking the US home loan market these days.

His attention has been drawn by recent events in the $500 billion sub-prime loan segment, which accounts for a fifth of all loans in the US home loan market.

Around 20 sub-prime lenders (companies that lend to risky borrowers at higher interest rates) in the United States have closed down, filed for bankruptcy or lost money. Two recent cases -- New Century Financial Corp and Fremont General Corp, both large lenders -- have rattled the market even further.

Although Roy has put a team of executives at his company, Quattro BPO Solutions, on the job of tracking the situation in the United States, he is not unduly worried.

"It is an unfortunate development. But, it creates an opportunity and we are in active discussions with some companies," he said.

http://inhome.rediff.com/money/2007/mar/14offshore.htm

[theoldman]

1. I guess I fail to see how the mortgage problem will lead to an

off shore boom. The houses are here and are sold to people living in the US.

[stormymonday]

2. All New Century has to offshore is its debts

The article is panglossian gibberish from start to finish.

Where the hell do they think the money to pay for the outsourcing comes from in the first place ?

If the world's financial system goes belly up then the Indians will get screwed along with everyone else.

[NJCher]

4. yeah, remember the hit the Japanese took

They invested in major real estate holdings in NYC (and probably elsewhere, but I mainly recall NYC). I don't know if they stuck with them through to the current boom but for a long time they were in a loss position.



Cher

[Telly Savalas]

3. The rationale seems to be that the crappy financial situation

puts pressure on sub-prime lenders to cut costs. However the source of these lenders' woes isn't that their administrative costs are too large, but rather that they're holding a lot of bad debt. Rather than shipping eveything off to Mumbai (and incurring unnecessary transition costs), beefing up the administrative infrastructure stateside so that there's more judicious risk selection is the way to target the problem.

[melm00se]

5. this is your classic

"buy low" scenario.

these companies, regardless of past mistakes, service a significant and highly lucrative market and have stakes in the ground in that market. So angling to buy them, their assets, and (what's left) of their market position is not such a bad idea....for the right price.

[Tellurian]

6. It might work..

The Indians would be seeking to buy their 'paper' more than likely in Bankruptcy Court. Many of these subprime lenders are owned by Parent Company such as Goldman Sachs, Leehman Bros, Merrill Lynch. My thinking was after the closings, there would be a reorganization under a new corporate name, while the old company took the hit for the losses, the parent company would just reopen their subprime division under yet another name, owning the loans at wholesale prices.

If the Indians get involved, the blue chip companys may not cotton to outside investors playing in their backyard.

[A HERETIC I AM]

7. If the "paper" is defaulted on, there will be nothing to own. But that is not what the article is

about. BPO = "Business Process Outsourcing" The guy is looking to simply make money off of processing loans, not buying bonds or properties.


BTW, the paper you are most likely referring to are what are known as CMO's or Collateralized Mortgage Obligation bonds. If the payers stop paying on the underlying loans, the mortgage company defaults on the loans and takes possession of the properties. The problem here is that the value of the real estate is going down. The bonds were issued with the promise that the loans would be repaid. If the loans aren't repaid the bonds are defaulted on and become either worthless or would be surrendered for pennies on the dollar.

The Sub-Prime lenders that are going belly up are doing so because of the large amount of defaults on the loans they made. If they repackaged those loans as CMO bonds the bond holders are going to be holding paper worth less and less until the real estate is resold and new mortgages written. If any of those lenders try and find new cash themselves by issuing bonds, those bonds will most likely be in the 8% range and rated BBB or lower.

The Indians interest seems to me to be the opportunity to simply offer staffing for the paperwork that will be needed when all the newer loans start to be written (at least thats how the article read to me).

Also, money is money and the "Blue Chip Companys" won't give a damn where it is coming from. International investing is not new and it isn't going to stop. You yourself can now buy international REIT's, so that is a non issue.

If i am not mistaken, damned few of the sub-prime lenders are "Owned by Parent Company such as"...Goldman, Lehman or Merrill. Those firms might have underwritten some of the CMO's or perhaps hold them in their company portfolios but to my knowledge, they aren't owned by the large firms. Please correct me if i am wrong.

[Tellurian]

8. As far as the first half of your statement..

Processing loans is not an expensive proposition for a lender. I can't see where the Indians could offer much of a benefit to the Lenders. And why I believe my projection is correct.

If i am not mistaken, damned few of the sub-prime lenders are "Owned by Parent Company such as"...Goldman, Lehman or Merrill. Those firms might have underwritten some of the CMO's or perhaps hold them in their company portfolios but to my knowledge, they aren't owned by the large firms. Please correct me if i am wrong.

Some of the lenders hold their own paper, like New Century and Saxon. Saxon which was recently bought by Morgan Stanley. First Franklin Financial was recently bought by Merrill Lynch. General Electric owns GMC mortgage, which is it's subprime mortgage arm.

Lehman Bros owns Aurora, which is an Alt/A lender. Deutsche Bank recently bought a Massachusetts lender by the name of 'Mortageit,' which is another Alt/A Lender. That in addition to buying mortgages from issuers, put thousands of them into pools to spread out the risks then divide them into slices, known as tranches, based on quality. Then sell them.

The profits from packaging these securities and trading them to customers and their own accounts has been extremely lucrative. Leehman Bros mtg related business contributed directly to record revenue and income over the last three years.

So you see, most of the 33 lenders that have just closed their doors certainly will be taking a loss. If those losses can be applied to the record profits of their Parent company, it's a winner all the way for them.