U.S. lenders view the United Kingdom today in much the same way Britain once viewed its colonies-as a market for more civilized procedures and technology.
Just one example of the practices that still prevail here is the calculation of borrowers' interest payments annually rather than monthly. Even if a borrower pays off a mortgage in the first few days of a year, he or she still must pay the rest of that year's interest.
But competition has intensified in recent years, bringing lower rates and more accommodating loan terms. Now two of the biggest U.S. lenders hope to accelerate that process.
"We will raise the bar on customer service in the United Kingdom," said Richard S. Lewis, a managing director at Countrywide Home Loans, the largest independent U.S. mortgage company.
Faced with a mature-that is, slower-growing-market back home, U.S. companies are looking overseas for growth opportunities. The thrust is not lending, though, but outsourcing of U.S. systems.
Mr. Lewis is chief executive officer of Global Home Loans, a joint venture between Countrywide and Woolwich PLC, the United Kingdom's fifth- largest home lender. Announced in February, the venture will begin processing mortgages for Woolwich next month at its newly built headquarters in Dartford, England.
Another U.S. mortgage giant, HomeSide Lending, plans to do the same for its sibling U.K. institutions-after it has rejiggered its systems to service loans for their parent bank in Australia.
U.S. home lenders have made forays into the United Kingdom before, most recently a controversial push by several companies that specialize in lending to less creditworthy, or subprime, borrowers.
But Countrywide and HomeSide said they plan to focus, at least initially, on back-office activities, which they hope U.K. lenders will contract out to them. For these gigantic companies, international expansion is a way to maximize the return on huge investments they have made in technology.
At a Mortgage Bankers Association of America conference in London last week, several speakers remarked how home lending in Britain resembles the U.S. market more than a decade ago.
Until recently the U.K. market was dominated by building societies, the equivalent of U.S. thrifts, and banks. These institutions mostly offer loans with adjustable rates and steep prepayment penalties. Though refinancing-known in Britain as "remortgaging"-now accounts for about 35% of the market, it is a relatively novel phenomenon.
In the last two years new entrants such as Virgin Direct, Egg Mortgage, and Standard Life Bank have come on the scene, offering cut-rate pricing and more appealing products.
"There are many more companies out there than there were five years ago, and many more mortgage products," said Lizzie Sparrow, editor of What Mortgage, a magazine that gives advice and rate information to British homebuyers.
Indeed, some of the new products are quite innovative, even by American standards. One, an Australian import called the "flexible" mortgage, lets borrowers who have paid down their mortgages faster than scheduled take a payment "holiday" or redraw up to the scheduled amount.
Virgin Direct, part of mogul Richard Branson's business empire, offers a "current account mortgage," which combines borrowers' mortgages with their checking accounts. The interest payment on this loan is calculated daily by using idle money in the account to offset the loan balance-reducing the borrower's cost.
Meanwhile, the Bank of England has cut its base lending rate 250 basis points in the last year, putting further pressure on U.K. mortgage rates. And some of the upstarts such as Egg have offered higher rates to depositors, forcing others to follow suit. The result: Lenders' margins have narrowed considerably.
"It's becoming more difficult to be profitable just on interest income," said Nigel Tobin, operations development director at Woolwich.
And that's where Countrywide and HomeSide say they come in.
"The only thing that's left for people to play with is cost base," said David Thompson, senior vice president of strategic planning at HomeSide.
"We're about providing efficiency and low costs to lenders," Mr. Lewis said.
There is certainly room for improvement when it comes to efficiency. Telephones are used much less in servicing than in the United States, Mr. Lewis said; borrowers are more likely to correspond with servicers through the mail.
In general, servicing is much less automated and more "people-intensive" than in the United States, Mr. Lewis said. Until a few years ago, most banks serviced loans from local branches, though the larger ones have moved toward centralization of that function.
U.K. servicers also don't have the kind of workflow management technology that makes their counterparts in the United States so efficient, Mr. Thompson said.
But exactly how much the Americans can reduce costs is unknown because the cost of servicing remains a mystery.
In the United States, the mortgage process is broken down into many different pieces, each handled by specialists: originations, processing, underwriting, appraisals, funding, servicing, subservicing. In the United Kingdom, most if not all these activities are handled by the lender.
"Because the process is bundled, there's less knowledge of what the costs of each individual piece are," said Mr. Thompson. "It's all cross- subsidized effectively."
Unlike the United States, Britain has seen little securitization of mortgages, and most of it has been in the subprime sector. Most lenders simply hold the loans in portfolio.
One consequence of that is that there is a greater diversity of products than in the United States, where Fannie Mae and Freddie Mac have made the 30-year, fixed-rate mortgage the industry standard.
But securitization has also given Countrywide and HomeSide experience in servicing loans for a host of investors: Fannie, Freddie, Ginnie Mae, and private conduits.
"In America, we're used to getting odd bits and pieces of portfolios that don't match anything and servicing them as efficiently as possible," Mr. Lewis said.
Though "oddball" loans may be costlier to service than a Fannie or Freddie loan, Countrywide can service them for less than a smaller servicer, he said. "We'll bring that scale to the U.K."
Britain's portfolio lenders, on the other hand, are used to servicing loans only for themselves.
The Global Home Loans venture is made up of nine expatriate Americans from Countrywide, including Mr. Lewis, and 700 former Woolwich employees.
In the next six months, it plans to load Woolwich's $40 billion portfolio onto Countrywide's servicing platform, which has been modified to fit British idiosyncrasies.
Global Home Loans also plans to pick up other customers. Eventually, Mr. Lewis said, Countrywide itself may originate loans in Britain, though it would have to do so using a different name so as to avoid confusion with a British company called Countrywide. Both the California-based Countrywide and Woolwich have pledged to send all their loans to the joint venture.
Mr. Tobin said the joint venture would aim to develop longer-term, fixed-rate products, with "more rational" prepayment penalties.
One person attending last week's conference asked whether the outsourcing arrangements create conflicts of interest: Why should a lender trust valuable information in the hands of a competitor like Woolwich, or a potential competitor like Countrywide?
Mr. Tobin replied that there would be "Chinese walls" between the joint venture and the lenders; Woolwich will not have access to other Global Home Loans customers' files.
Added Mr. Lewis: "We think efficiency and good customer service will outweigh that fear."
HomeSide's parent, National Australia Bank, also owns three banks in the United Kingdom-Clydesdale Bank, Yorkshire Bank, and Northern Bank-and one in Ireland, National Irish Bank.
HomeSide said it plans to work with them, and with other U.K. banks outside the National Australia family, as it does with its "preferred partners" in the United States. The partners deal with the customer at the point of sale, leaving the nitty-gritty of processing and servicing to HomeSide.
Because HomeSide's partners retain control over cross-selling, "the model HomeSide uses in the U.S. is nonthreatening to them," Mr. Thompson said.
Beyond the United Kingdom, the U.S. megaservicers are eyeing continental Europe. Woolwich has businesses in Italy and France, and Mr. Lewis took a preliminary trip to Milan last week to study the Italian mortgage market.
But moving from Britain to the continent is not like expanding from New York to New Jersey. Despite convergence of the European economies using the euro currency, customs, language, and culture vary widely across Europe, and the mortgage markets are all very different.
"The U.K. isn't necessarily a bridgehead into Europe," said Andrew Barton, mortgage product director at Abbey National PLC, Britain's second- largest home lender.
For example, he said in a presentation at last week's MBA conference, foreclosure is relatively easy in Britain but can take as long as 10 years in Italy.
Even in Britain, Countrywide is up against forces it hasn't had to deal with back home. The company has always been very quick to react to changes in interest rates and applications volume by staffing up or downsizing.
But the United Kingdom has stronger unions and employment laws, so the joint venture may not be able to follow Countrywide's strategy of "train, transfer, terminate," Mr. Tobin said.
Another issue to consider: value-added tax, which varies across Europe. In Britain the tax, which can apply to any exchange of goods or services, is 17.5%; in some parts of Europe, it's 21%.
"Theoretically that makes outsourcing more expensive," Mr. Thompson said.
The mortgage market in a new country has to be large enough to justify the time and effort, Mr. Thompson said. In his mind, only France, Germany, and the Netherlands may be big enough markets to fit HomeSide's requirements.
"There are potential opportunities," he said. "It's a matter of adding up the costs and looking at the size of the prize."