FNF's Reported Bid for LPS Reflects Industry's Drive Toward Bundling
Mortgage processor Lender Processing Services is reportedly in talks to be acquired by title insurer Fidelity National Financial and private equity firm Thomas H. Lee Partners in a $2.9 billion deal.
As the megabanks continue to write down the value of their residential servicing portfolios, now may be the best time ever to buy housing receivables, according to a report from Mortgage Industry Advisory Corp.
Fidelity National Financial's reported plan to reacquire Lender Processing Services would create a new revenue stream for the title insurer at a time when demand for bundles of technology and services is increasing across the mortgage industry.
The two companies, whose corporate headquarters share a Jacksonville, Fla. address, dominate their respective core areas of operation: FNF's four underwriting units collectively issue more title insurance policies than any other title company; LPS's Mortgage Servicing Package (MSP) is the system of record for approximately 50% of all U.S. mortgages, as measured by dollar volume.
One other trait the companies share is that each has reached the point where their deep market penetration makes further organic growth difficult.
"Fidelity has the same problem on the title side that LPS has on the servicing technology side," said a veteran mortgage technology executive, who spoke on condition of anonymity.
In addition to title insurance and services, Fidelity offers mortgage technology and fulfillment services through its ServiceLink subsidiary and owns controlling stakes in two restaurant groups. LPS, in addition to its origination and servicing technology, provides mortgage underwriting and settlement services and is a significant provider of default and foreclosure services.
A combination would enable the companies to offer FNF's suite of title and mortgage services to LPS's base of mortgage-servicer clients.
"It gives them so much leverage to cut deals and have a relationship that's in the hundreds of millions of dollars," a servicing industry executive said on condition of anonymity. "Servicers will receive great benefits as far as functionality and a single-source provider."
The acquisition would bring LPS back under the Fidelity umbrella nearly seven years after it was included in FNF's November 2006 spinoff of Fidelity National Information Services, which is known as FIS. LPS became independent of FIS after a July 2008 spinoff. Fidelity executive vice president Brent Bickett, who played a key role in orchestrating the FNF-FIS spinoff, is also involved in arranging the current LPS deal, according to a source familiar with Fidelity's operations. FNF declined to comment. LPS did not respond to a request for comment.
Without a core servicing platform, FNF's technology has been relegated to developing ancillary systems that plug into LPS's MSP. LPS's origination technology meanwhile, has failed to garner the same market dominance as its flagship servicing system.
"[W]e believe FNF's management has been attempting to rebuild the mortgage servicing platform and recognized that LPS' MSP platform was difficult to build organically," Barclays analyst Darrin Peller wrote in a May 23 research note. "In addition, we suspect there may be accretive opportunities to merge the title businesses of the two companies."
The $2.9 billion acquisition by Fidelity and Thomas H. Lee Partners, a private equity partnership, would be funded with a combination of cash and FNF stock, according to The Wall Street Journal, citing "people familiar with the matter."
LPS last month froze employee salaries, bonuses and retirement fund contributions ahead of the acquisition, according to the mortgage technology executive.
IBM has long been rumored to have in interest in acquiring LPS, particularly given the tech giant's growing involvement in the mortgage industry via Seterus, its residential servicing division.
Some uncertainties involved in an LPS acquisition have been resolved only recently. LPS has now largely reconciled the legal challenges it faced over its role in the robo-signing foreclosure scandal, including an April 2011 consent order with federal regulators.
"[W]ith the legal and regulatory headwinds almost entirely behind the company and strong normalized earnings, we see LPS as an attractive target for acquisition, particularly by a consortium of private equity and a company such as FNF," Peller wrote.
MSP remains the "crown jewel" of servicing technology because of its market ubiquity and high profitability, the servicing executive said. What's more, the legal challenges it faced have forced LPS to invest in improvements, he added.
"They weren't real strong on audit, compliance and risk and they've spent millions on that to build it out and bring it up to par," the servicer said.
However, the focus on regulatory issues has come at the expense of technological innovation in other areas of the company, the executive said.
"LPS has reverted back to the mentality to 'hunker down and MSP will take us through,'" the servicer said. "It's not an entrepreneurial environment at LPS. Fidelity has that entrepreneurial spirit and drive."
The company now known as Lender Processing Services has gone through a series of transformations since Computers & Systems first launched MSP in 1965. C&S changed names to Computer Power Inc. in 1969, and ALLTEL Information Services acquired it in 1992. Title insurance company Fidelity National Financial purchased ALLTEL Information Services in 2003, renaming it Fidelity Information Systems.
Combined with payment services firm Certegy, the company was renamed Fidelity National Information Services and spun into its own publicly traded company, under the stock ticker FIS, in 2006. Then in 2008, the mortgage processing and services portion of FIS was spun off into a separate publicly traded company the current LPS.