Foreclosure Delays, Changing REO Strategy Impacts LPS Revenue

The segment of Lender Processing Services that provides mortgage default, foreclosure and real estate owned services was the only area of the company to report declined annual review in 2010 compared to 2009. The company said ongoing delays in the foreclosure process are to blame and they expect the situation to continue in 2011, impacting potential revenue streams.

Further impacting the Jacksonville, Fla.-based company are ongoing investigations and the risk of lawsuits alleging wrongdoing in its foreclosure processing operation.

Default Services had 4Q10 revenue of $251.3 million, down nearly 10% from $278.6 million in 4Q09 and down 5.4% from $265.6 million in 3Q10. Annual Default Services revenue was $1.06 billion in 2010, down 6.7% from $1.13 billion in 2009.

New foreclosure filings increased in 4Q10, but LPS said it’s not until foreclosure proceedings actually begin that the company realizes revenue related to those operations. 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,” said Thomas Schilling, the chief financial officer at LPS, during a conference call with analysts.

LPS doesn’t expect the clog in the foreclosure pipeline to clear until 2012, when it projects the potential revenue generated by the entire default servicing industry will increase to $5.5 billion, from $5.3 billion in 2010 and 2011. While foreclosure starts are still indicative of future revenue potential, “the continued delays in foreclosure proceedings make the timing of future revenue difficult to predict,” Schilling said.

Executives warned it could face more 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 civil litigation related to its foreclosure processing business.

President and CEO Jeffrey Carbiener said the company continues to “fully cooperate” with regulatory investigations. A lawsuit in Nevada was recently dismissed and Carbiener said LPS hasn’t been served in a pending case in Kentucky. In addition, LPS contends it did not provide administrative services on the mortgage in question in a lawsuit 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 in foreclosure cases.

“While we are still progressing through most of these matters, it is difficult to predict final outcomes at this time,” Carbiener said in the analyst call. “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.”

Default Services also provides REO asset management, where historically, LPS has fronted the cost of repairing and maintaining properties on behalf of clients. The costs are then passed through to the servicer and accounted as revenue with equal cost of sale.

But the business model is changing and now servicers want to fund those expenses directly, reducing revenue and costs equally. If the REO pass-through activity is excluded, the 4Q10 revenue decline improves to 7.4%, from 9.8%.