The much maligned mortgage market has the entire banking industry scrambling - scrambling to comply with regulations, to manage residential defaults, to upgrade commercial mortgage processes, to better manage risk, and to extend credit wisely. For Lender Processing Services it's difficult to imagine the business environment for getting any better. "When you think of the entire banking space, they are in the ideal sweet spot," said Ellen Carney, a senior analyst at Forrester Research.
In the first half of 2010, LPS revenue totaled $1.19 billion and adjusted net earnings grew 14.5% year-over-year to $160.7 million. LPS, a provider of mortgage processing services, settlement services and default solutions, was spun off of Fidelity National Information Services in July 2008.
Today, all of the nation's top 50 banks use some product or service from LPS and more than 50% of all the nation's foreclosures are managed through the company's desktop technology. As Carney said, that's a good niche to occupy.
Jeff Carbiener, CEO of LPS, outlines six forces that are driving growth at LPS. First is the regulatory environment. "The industry is challenged by an active regulatory environment, and for a business like ours that's good because it creates a problem that needs to be solved."
Another factor is that many financial institutions face capacity overload as they cope with a surge in refinancings and at the same time they must work through a large number of troubled loans. This capacity issue has banks looking to make processes more efficient and sometimes outsource these processes to LPS. "Foreclosure is not a revenue generator, so you need processes to get through them more efficiently and less costly," Carbiener says.
Other factors driving business at LPS include banks' need to better manage risk, to identify and manage at-risk loans before they become delinquent, and tight IT budgets that induce banks to outsource. Carney of Forrester adds, "All the banks are under intense pressure but don't have the necessary IT staff. The BPO service that LPS offers is fantastic."
In the past some analysts have worried that LPS' growth can't be sustained once the mortgage crisis passes. But Carbiener is positioning his company for the long term. BPO contracts provide revenue stability that gives investors comfort. And, he argues, the widespread use of the company's mortgage technology positions LPS to sell other products to financial institutions - which he says are increasingly interested in consolidating vendor relationships. "As we prove that we can automate foreclosures at the bank, we're pushing into other areas, such as tax, escrow and REOs."