Home Loan Banks Eye Outsourcing

The Federal Housing Finance Board will soon decide whether to hire private companies to run the data-processing operations of the Federal Home Loan Bank System.

The decision is expected in the first half of 1992.

At issue is how best to consolidate technology operations of the 12 regional Home Loan banks, which finance housing programs at thrifts and savings banks. An "outsourcing" deal seems the likely choice, insiders said.

In recent months, the Home Loan banks have felt increasing pressure from the Finance Board, which supervises them, and from banking associations to cut back-office costs.

Goal: Cutting Costs

Though the 12 banks have reduced inefficiencies somewhat, they can do more by pooling their data processing, Finance Board officials say.

The Federal Reserve Board last June announced its own technology consolidation plan, under which its 12 data centers would be reduced to to three.

"We are looking for a common [data-processing] system for all the Home Loan banks, and in a lot of ways outsourcing is the best solution," said J. Steve Britt, the Finance Board's executive director.

Another Option

Mr. Britt stopped short of committing to outsourcing as the solution. He said the Finance Board is also considering in-house arrangements whereby the banks' data processing volume would be pooled and handled at one or two centralized processing sites.

But according to an insider at one Home Loan bank, the preferable option is choosing among the bevy of outsourcing providers - such as EDS Corp., Dallas, a unit of General Motors Corp.; Integrated Systems Solutions Corp., a unit of International Business Machines Corp.; Systematics Information Services Inc., Little Rock, Ark.; and Newtrend, San Mateo, calif.

"Check processing, data processing - these are things we just don't want to be involved in if we don't have to," said a high-level executive at a Home Loan bank who requested anonymity.

Some Independent Moves

Several Home Loan banks have moved to make improvements independently of the Finance Board.

The Chicago, Seattle, Dallas, and San Francisco banks sold their check-processing businesses to private companies, including Fiserv Inc., Milwaukee.

The San Francisco Home Loan Bank - the largest of the system's 12 members - handed over its data processing to Systematics. The five-year contract, valued at $80 million, will run its course regardless of the Finance Board's data-processing solution for the Home Loan Bank System, Mr. Britt said.

Although such moves have allowed the Home Loan banks to remain profitable, a number of forces are requiring the Finance Board to adopt more sweeping cost-cutting measures.

A Diminishing Role

The Darwinian thinning of the thrift industry has caused membership to wane in the Home Loan System. This seriously undermines the Home Loan banks' ability to carry out their primary task, funding mortgage lending. It also reduces the system's revenue stream.

"The system must turn around its current rapid shrinkage and attract new members," said Mark Riedy, president of the National Council of Community Bankers in Washington. "New members will join and borrow only if they see the system as a sound, profitable investment."

The Home Loan banks also face higher costs. Under the Financial Institutions Reform, Recovery, and Enforcement Act, the home loan banks will have to pay $400 million annually to help fund, among other activities, the thrift bailout.

The 1992 budget for the Home Loan banks calls for a $39 million reduction in operating expenses. Because as much as 40% of that sum is to come from streamlining of data processing activities, expectations have been raised that a large outsourcing contract may be near.

Big Contract Expected

In coming months the Finance Board's efficiency task force will solicit proposals from outsourcing vendors on centralizing data processing operations.

"The goal is to review [request for proposal] submissions and award a contract by summer - in time to coincide with the 1993 Bank System budget cycle," said Finance Board Director Marilyn R. Seymann.

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