Origination services and technology at Lender Processing Services showed annual and quarterly revenue gains in the fourth quarter of 2010. But its corresponding business in the mortgage servicing and default arenas closed out the year with quarterly declines, according to recent regulatory filings.
Jacksonville, Fla.-based LPS is one of the largest technology and services vendors to the mortgage industry. It provides software to both mortgage lenders and servicers, like the Mortgage Servicing Package, a technology platform used for payment processing and other servicing tasks for 53% by dollar volume of all active mortgages in the U.S., including loans serviced by Wells Fargo and JPMorgan Chase. It also claims a 10% market share in the sector of mortgage loan origination system technology.
Along with technology, LPS provides mortgage underwriting and settlement services and is a significant provider of default and foreclosure services.
For all of 2010, only the default services segment experienced a revenue decline, while technology and origination services increased revenue. The day before LPS released earnings at the close of markets on Feb. 3, LPS announced a $0.10 per share quarterly dividend, payable on March 17.
On a conference call with analysts, LPS executives pointed to the volatile shifts in the mortgage industry as factors contributing to its financial results.
"LPS was coming off an extremely strong year in 2009. We benefited from origination and default market volumes increasing on a year-over-year basis, which allowed us to grow our revenue base by 29%," Jeffrey Carbiener, the president and CEO of LPS, told analysts. "In 2010 we had to deal with the exact opposite."
LPS projects total mortgage originations of $1 trillion in 2011, down 30% from 2010 and said the ongoing delays in the foreclosure process will continue in 2011, impacting potential revenue streams.
To combat the sluggish business, executives said the company will look to grow market share in its various segments to maintain revenue. But a number of factors will weigh heavily on the company's ability to follow through with that strategy.
LPS said that it could face additional federal and state investigations into its mortgage default and foreclosure operations. In addition to ongoing inquiries and lawsuits, LPS warned that the company also risks being involved in new civil litigation related to its foreclosure processing business.
Carbiener said the company continues to "fully cooperate" with regulatory investigations. Carbiener told analysts that a lawsuit in Nevada was recently dismissed and added that LPS hasn't been served in a lawsuit that's pending in Kentucky.
In addition, LPS contends it did not provide administrative services on the mortgage in question in a lawsuit that was filed in Mississippi, and a judge will soon rule on a motion to dismiss that case.
The claims in the lawsuits vary, but center around allegations of wrongdoing in the way LPS manages its network of attorneys and its use of technology and processes to help servicers facilitate foreclosure cases.
"While we are still progressing through most of these matters, it is difficult to predict final outcomes at this time," Carbiener said.
"We do, however, continue to believe that based on what we know today, the ultimate outcome of these inquiries will not have a material adverse impact on our business or results of operation."
The LPS loan transaction division includes both the LFS segment and the default services segment, the later of which offers legal services processing and real estate owned property management and disposition.
Default services revenue declined nearly 10% in the fourth quarter and was the only segment in the two LPS divisions to have an annual decline in revenue in yearend results.
New foreclosure filings increased in 4Q10, but LPS chief financial officer Thomas Schilling said it's not until foreclosure proceedings actually begin that LPS generates revenue from its default services operation. Proceedings declined 33% compared to 4Q09.
"This is due to continued delays in the start of foreclosure proceedings caused by a variety of issues, including regulatory mandates, GSE directives, judicial actions and voluntary delays by the services," he said.
LPS doesn't expect the clog in the foreclosure pipeline to clear until 2012. The total revenue potential if every possible customer was using LPS's default services-called core addressable market-is projected to remain at 2010's level of $5.3 billion in 2011, before increasing to $5.5 billion in 2012.
While foreclosure starts are still indicative of future revenue potential for LPS, "the continued delays in foreclosure proceedings make the timing of future revenue difficult to predict," Schilling said.
The loan facilitation services segment led all LPS businesses in 4Q10 revenue growth, up 31.8% year-over-year. LFS provides title, appraisal, tax and other origination and settlement services-but it's a sector that LPS projects will see its marketwide revenue potential dive nearly 30% in 2011, due to the expected decline in loan originations in 2011.
Core addressable market for the LFS segment will decrease to $4.6 billion in 2011, a drop of nearly 30% from $6.5 billion in 2010, according to supplemental materials to the quarterly and annual financial statements.
A 10.9% increase in 2012 will recover some of the drop, but LPS projects the total available market revenue for those services will still only be $5.1 billion.
"Given the current industry forecast expects the refi market to decline about 60% in 2011, our market share gains will be within a substantially smaller refi market," Schilling told the analysts.
LPS projects addressable revenue for its technology, data and analytics unit-providers of mortgage servicing and origination software-will remain steady at $2.3 billion from 2010 to 2012. When asked if the projections mean LPS isn't expecting lenders to procure mortgage technology, an LPS spokesperson said there are limited conditions for lender appetite, including loan servicing, regulatory requirements, risk mitigation and demand for increased efficiencies.
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