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Lender Processing Services (NYSE:LPS)

Q1 2013 Earnings Call

April 25, 2013 10:00 am ET

Executives

Nancy Murphy - Vice President of Investor Relations

Hugh R. Harris - Chief Executive Officer, President and Director

Thomas L. Schilling - Chief Financial Officer and Executive Vice President

Analysts

Carter Malloy - Stephens Inc., Research Division

Darrin D. Peller - Barclays Capital, Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Kevin D. McVeigh - Macquarie Research

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Operator

Good day, everyone. Welcome to the Lender Processing Services First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. Your participation on this call is implied consent. If you do not wish to be recorded, please disconnect at this time.

I'd now like to turn the conference over to Nancy Murphy, Vice President, Investor Relations. Please go ahead.

Nancy Murphy

Thanks you, Danna. Good morning, and welcome to Lender Processing Services First Quarter 2013 Earnings Conference Call. Hugh Harris, CEO; and Tom Schilling, CFO, are with us today to review results and answer your questions. [Operator Instructions]

Before we get started, I would like to remind you that our earnings release and supplemental slide presentation are available on the Investor Relations section of our website. I would also like to remind you that we may make forward-looking statements during today's call and those statements are subject to various risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including our 10-K, most recent 10-Q and earnings release. We do not undertake any duty to update or revise those forward-looking statements, including quarterly guidance. In addition, our discussion today will contain references to non-GAAP results in an attempt to provide a more meaningful presentation in comparison to prior periods. Reconciliations between GAAP and non-GAAP results have been provided in the earnings release.

Now I'll turn the call over to Hugh.

Hugh R. Harris

Okay. Thank you, Nancy. Good morning, and thank you for joining our call today. I'm going to start with an overview of the first quarter then Tom will discuss our financial performance. And finally, we'll open the call up for questions. We are very pleased to begin 2013 with strong operating and financial performance.

LPS delivered 10% growth and adjusted earnings per share to $0.66 in the first quarter, which is in line with our guidance. Continuing strong results in Technology, Data and Analytics and Origination Services fueled the positive performance. Our results reflect the successful execution of our customer and technology-driven strategy, aligned with the evolving needs of the mortgage industry. We believe we are on track to continue to achieve high-quality revenue growth in TD&A while managing profitability in Transaction Services in response to origination and default volumes.

First, we'll address our TD&A segment. While the environment remains challenging, the mortgage industry is working through a significant transformation. The ability for industry participants to efficiently comply with new regulations and business process requirements is essential to long-term success. As lenders move beyond legacy issues, including the recent settlement of many bank Consent Orders, we are seeing an even greater focus on deploying technology to reengineer processes and to address the cost structure of originating and servicing loans. We are collaborating with our clients, including the nation's leading and emerging mortgage institutions, to address these needs. And we are providing our clients with solutions to deliver a high return on investment and that leverage our scale, compliance, integration and industry best practices.

As a result of this focus, first quarter revenue growth in TD&A was one of the highest in LPS history. Servicing Technology had a particularly strong quarter as we continue to build on our market-leading platform. We're making progress on many initiatives, including winning share of first mortgage and home equity loans with existing and new clients while expanding systems capabilities to drive revenue per loan. Demand for LPS Professional Services continues to grow as our clients look for expertise in both mortgage and technology. For example, we recently implemented dedicated Default Technology teams for 3 top 10 services to optimize the value of the platform in their operations.

We're also pleased with the progress of our new growth platforms, including Origination Technology and Data & Analytics. We expect these initiatives to expand our market leadership, generating high-quality, long-term revenue growth. Loan Origination Technology is an important part of our strategy to drive revenue from purchase origination volume as the housing market recovers. We have aligned our loan origination and loan quality platforms to meet the needs of lenders that are reengineering their processes for quality, transparency and efficiency. And we continue to expand the capabilities of these platforms.

We are also moving forward with a strong contract pipeline. One example is the successful implementation of our LendingSpace platform to support Nationstar's correspondent originations. We completed an accelerated implementation and have heard that this platform quickly added value to Nationstar's correspondent lending operations. We're very pleased with this expanding relationship. Data & Analytics posted strong revenue growth as we continue to invest by valuable business intelligence to help our clients make more informed decisions. The market for big data in the mortgage space has attracted long-term growth potential as the industry moves forward with integrating data and analytics into their business processes. I've been very focused on meeting with clients over the past few months and our discussions reinforced this theme.

LPS has the necessary advantages to win share and induce demand with our technology delivery channels, our mortgage industry expertise and our very deep client relationships. The expansion of our property records database is on track to be completed midyear. The expanded data set significantly strengthens our competitive position with coverage of over 98% of U.S. residential properties. Financial institutions, investors, government agencies and the real estate industry use this data for a broad range of purposes including managing risk, monitoring portfolios, assessing collateral, determining property values, loan acquisitions and customer retention. Additionally, as a leading aggregator of mortgage data to the U.S. government, we're very pleased to have significantly expanded our contract with the Federal Reserve Board around data aggregation.

Moving onto Transaction Services. Origination Services capitalized on continuing strong mortgage refinance volume fueled by historically low interest rates and the HARP program. We are pleased with the recent announcement of the extension of the HARP program through 2015. Our highly efficient centralized settlement services support the majority of the top 20 originators who represent over 70% of the industry transaction volume. As we said last quarter, while we continue to expect that refi volume in 2013 will be down from the strong 2012 levels, we remain more optimistic than many market forecast, including the MBA. The LPS Mortgage Monitor reports that approximately 9 million loans still have refi-eligible characteristics.

Moving to Default Services. We have made significant enhancements to improve the risk return profile to position LPS to meet client needs in these ever changing market conditions. While we cannot control industry volumes, we can deliver scale and compliance services while managing the profitability. Over the past year, foreclosure activity has declined to near pre-crisis levels as servicers adapt to new requirements. However, the LPS Mortgage Monitor still reports a significant backlog of approximately 3.2 million seriously delinquent loans. New regulations, including our National Servicing Standards, effectively extend the time it takes to complete the foreclosure process and encourages alternatives to foreclosure, including modifications and short sales. While the near-term outlook remains difficult to predict, we continue to believe we are well-positioned to win our share of industry volumes over time.

On the legal and regulatory front, we're very pleased to have concluded many of the legacy legal and regulatory matters in the first quarter. We're moving forward with the final stage of the consent order and any remaining matters. I would also like to mention that we just completed our annual customer satisfaction survey and I'm very pleased with the results. Our clients tell us they see us as a strategic partner with the solutions to meet their evolving needs. The survey also told us that overall, our clients are happy with the customer support we provide which is a competitive advantage for LPS.

Before I turn the call over to Tom, I would like to welcome John Snow, former Secretary of the Treasury and President of JWS Associates to LPS Board of Directors. John brings extensive experience and operating complex organizations with expertise in areas including strategy, regulation and public policy. His insight and guidance will be of great value to our company.

Now I'll turn the call over to Tom who will review the financial results in detail. Tom?

Thomas L. Schilling

Thank you, and good morning, everyone. We're pleased with our strong financial performance in the first quarter. We reported GAAP earnings of $0.63 per diluted share and adjusted earnings from continuing operations of $0.66 per share, in line with our guidance and representing a 10% increase from a year ago. Our focus on higher return businesses and disciplined cost management drove an expansion of our EBITDA margin to 27% in the quarter, up from 24% in the year-ago quarter.

First quarter revenue totaled $472 million, a 3% decrease from the year-ago quarter as growth in Technology, Data & Analytics and Origination Services was offset by declines in Default Services. The performance of our TD&A segment was particularly strong. We grew revenue 10% year-over-year to $194 million with strong growth in all business lines. We expect TD&A to deliver growing share of future revenue and profitability as we invest in new Technology Solutions while leveraging our scale, expertise and deep client relationships to win market share.

Within Servicing Technology, we increased both the number of loans and revenue per loan to drive $116 million of revenue in the quarter or growth of 7% year-over-year. Growth in recurring revenue accelerated from share gains in both first mortgages and home equity loans, while revenue from data access and Professional Services remained strong as servicers leverage MSP to respond to changing business requirements.

Origination Technology revenue increased 18% year-over-year to $25 million. Strong origination volume drove an increase in transactional revenue on our loan origination systems and Loan Quality Gateway platform. We will continue to invest in Origination Technology solutions and expect to realize the benefits in 2014 and beyond. Default Technology revenue grew 5% sequentially and 16% year-over-year to $37 million. Market share gains and increased Professional Services continue to offset sluggish foreclosure referral volumes. Data & Analytics revenue increased 7% sequentially and 16% year-over-year fueled by contract wins, such as the Federal Reserve Board contract that Hugh mentioned earlier.

We believe the investment to expand our property records database will begin to drive revenue and profits later in 2013 and into the future. EBITDA for the TD&A segment increased 14% to $81 million in the quarter. And margins expanded to 41.6% driven by the strong revenue growth across our technology platforms. As we've indicated previously, while our investments in Origination Technology and Data & Analytics will pressure margins in the near-term, we expect margins to expand in 2014 and beyond as we grow revenue on these platforms and realize improved operating leverage.

Moving onto the Transaction Services segment. Origination Services revenue increased 12% year-over-year to $164 million in the first quarter. These results reflect strong refinanced volumes fueled by low interest rates and the success of HARP. Revenue growth was driven by title, escrow and flood services. Appraisal revenue stabilized sequentially but declined year-over-year due to the combination of the impact of HARP loans which do not require appraisal and stepping away from contracts that do not to meet our risk tolerance or margin requirements. Default Services revenue was $114 million in the quarter, down 31% from the prior year and 18% sequentially.

As we guided in our fourth quarter call, revenue continues to be pressured by declines in foreclosure activity as the industry reacts to new federal and state regulations and requirements. For example, the California Homeowner Bill of Rights which went into effect on January 1, had a significant impact as California default volumes declined by about half from the fourth quarter levels. We continue to focus on managing margins and expanding profitable market share as we near -- as near-term volumes remain difficult to predict.

Transaction Services EBITDA in the first quarter was $55 million, down 2% from the prior-year period. Despite the revenue decline in Default Services, we delivered a solid 20% EBITDA margin driven by strong Origination Services results. We are focused on reengineering our cost structure in response to lower industry volumes. Our goal is to rigorously manage our cost structure to sustain a Transaction Services EBITDA margin of around 20%-plus overtime.

Corporate expenses for the quarter totaled $11 million and were flat with the prior year and down slightly sequentially. We generated strong adjusted free cash flow of $50 million in the quarter. Our adjusted free cash flow excludes the legal and regulatory settlements and a tax payment made during the quarter for an operation sold in the fourth quarter. Capital expenditures totaled $28 million in the first quarter, primarily reflecting our continued investment in our TD&A businesses.

Moving onto the balance sheet. We maintained a strong financial position despite outflows of about $160 million in legal settlements during the quarter. We ended the quarter with liquidity of $486 million including $88 million in cash and $398 million of available capacity under our revolving credit facility. Debt at the end of the quarter was $1.1 billion, with an average interest rate of 5.1%, down 90 basis points from the prior year reflecting the successful refinancing we completed in the fourth quarter. The legal reserve totaled $61 million at quarter end and was further reduced in April as we paid the previously announced $14 million settlement related to shareholder litigation. Our capital allocation remains unchanged. First, we will continue to invest to protect and expand our leadership position in providing technology and data-driven solutions to the mortgage industry. In the near-term, we plan to rebuild our cash position to around $100 million plus the amount of remaining legal reserve. After that, we expect to return capital to shareholders as we have in the past.

Now I'll review the guidance for the second quarter. We expect consolidated revenue to be in a range of $460 million to $480 million and EPS from continuing operations to be in the range of $0.63 to $0.67. From a segment standpoint, we expect TD&A revenue to be up slightly. We expect Transaction Services revenue to be about flat with Origination Services down modestly from the first quarter driven by sequential decrease in industry refinance volumes while in Default Services, we expect revenue to be up slightly due mostly to seasonality within Field Services. Again, we're very pleased with the strong first quarter results and we'll remain focused on executing our technology and data-driven growth strategy.

Now I'll turn the call over to the operator so we can take a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Carter Malloy with Stephens.

Carter Malloy - Stephens Inc., Research Division

First, is there any update you can give us on the buyback? You said return cash as you prior -- as you've done previously after the $100 million cash position. Does that mean strictly buyback or is that also debt pay down?

Thomas L. Schilling

I think at this point, we're pretty comfortable with our debt levels. So I think our primary focus will be returning capital in the form of share buybacks and/or considering our dividend as well.

Carter Malloy - Stephens Inc., Research Division

Okay. And then on the free cash flow side, a little bit of fluctuation in working capital. But should we view working capital for the year as a net source of free cash or expense?

Thomas L. Schilling

I think we're going to be probably still in a net source for 2013 but not nearly as significant as we saw in 2012 or '11.

Carter Malloy - Stephens Inc., Research Division

And lastly, any further update on the consent order timeline?

Hugh R. Harris

I don't think we have an update on the timeline, Carter. But I would tell you, everything is progressing very well on that front. We expect to be completed with a document execution review in the second quarter. And then I don't know that everything will be completed by year-end but I don't anticipate any -- I mean, it's the same process we've been in for a while so I think it'll just continue to drag maybe early 2014.

Carter Malloy - Stephens Inc., Research Division

Okay. And in terms of that completion, do we need a final completion date or is there some point along the way maybe post document execution where you'll be more comfortable with returning cash either via buybacks or M&A?

Thomas L. Schilling

Yes, I don't -- I think at this point, the consent order process doesn't need to the complete before we start to consider returning capital.

Hugh R. Harris

I agree.

Operator

And we'll take our next question from Darrin Peller with Barclays.

Darrin D. Peller - Barclays Capital, Research Division

Let me just start off with the data. The TD&A segment obviously was very strong in this quarter and particularly, the technology parts of it. Moving away from the MSP for a minute, could you just talk a little -- just the opportunity for growing the Origination Technology and the Data Analytics longer-term? I mean, what are the -- first of all, what's driving it right now? I know you mentioned some attributes of it on the call -- or aspects about the call, but if you can give a little more detail on that and what we should be modeling and expecting for the rest of this year and maybe over the course of 2014?

Hugh R. Harris

Most of the growth on the Origination Technology, we talked about last year when we did the acquisition with LendingSpace. That has quickly gotten up to speed. I mentioned on the call the implementation we did with Nationstar. Everyone that we are operating with on the LendingSpace side is very excited about the product and using it quickly. On the Empower side, we mentioned last quarter, we had about 19 implementations scheduled for 2013. I think 4 or 5 of those are complete and we're moving forward with the others. So both of those, combined, is going to allow us to take advantage of this purchase market which we said last year was a focus for us to get prepared for the purchase markets as it comes back. And the other piece I would throw in there is around the Data & Analytics. We clearly see a strong need on the origination front for Data & Analytics. And as our people are out selling these products and working with the customers, we're finding tremendous opportunities to show them how we can provide the data they're going to need to meet the requirements and the regulatory issues that are coming their way.

Darrin D. Peller - Barclays Capital, Research Division

All right. And then on the MSP side, also, sequential growth again at it continues to really trend well overall. I mean, that's -- is that continuation of home equity loans, second lien loans basically coming onto the system? And then what are the other drivers there? And maybe just touch on the one big outlying bank that is obviously still in-house and some opportunity for you bringing that into your fold?

Thomas L. Schilling

On the growth but -- Darrin, yes. We -- as I mentioned, we had strong growth on recurring revenue, as well as continued strong demand for our data and professional -- or the data usage in the professional services on MSP. It was fueled. We picked up share. As you recall, we converted around 300,000 home-equity lines back in the third quarter and continue to pick up additional loans on first as well. Obviously, the clientele on the MSP platform are some of the banks who are generating the highest levels of new purchase originations so we continue to grow share as they grow share. And hope that, that will continue for us in the future.

Hugh R. Harris

One of the things, I mean, HELOCs appear to be come -- home equity's appear to be coming back and gaining a lot of popularity. And that is a focus for us and our team over the last couple of years because home equities are performing very similar to a first mortgage. So having those on MSP mix makes a lot of sense.

Darrin D. Peller - Barclays Capital, Research Division

All right. Just to wrap it up on this topic on TD&A. I mean, overall, that's the area that obviously was standing out here and then obviously showed margin expansion and helped contribute to margin expansion across the company given the mix. Is there any strategic reason why you think that you have to keep that business as part of the overall company? In other words, is there any correlation or really direct need and tie-in between the TD&A business and the origination, transactional businesses whether it's default or origination side? Or could be potentially ever be 2 separate entities?

Hugh R. Harris

Well, right now, they fit with everything strategically that we're working on. I mean, we feel we have a real opportunity to grow the Origination Services business and the default space. We're very comfortable with management now that we have in place. Bob Caruso and his team are doing an outstanding job there of managing the profitability. And as long as we can continue to get 20-plus margins in that business, which we think we can over time, I think it makes sense to keep it all together.

Darrin D. Peller - Barclays Capital, Research Division

Even though the multiple disparities probably having -- could be having an impact but -- and just last question for Tom and I'll go back to the queue. But on the free cash flow number, $50 million this quarter, your overall economics on the quarter were obviously strong versus last year's when you look at across the board, especially the margin contribution from TD&A. What was the driver of the free cash being something like $20 million lower? The factors for it.

Thomas L. Schilling

Yes. With the numbers on an adjusted cash flow, it's like $69 million last year. I think it was $50 million this year. The 2 biggest pieces are one, we had about a $4 million to $5 million of additional cash for CapEx in the quarter. And also, actually management bonuses in 2013 for the 2012 performance. Two things happened there. One, bonus payments were higher in 2012 because the performance was better. And we converted everybody in the company from a lot of people who are on quarterly bonuses to be aligned with the rest of the management team on annualized bonuses. So that put a little bit more of that impact in the first quarter.

Darrin D. Peller - Barclays Capital, Research Division

All right. So normalized and run rate from a free cash standpoint, I mean this quarter had a little bit of more unusual items impacting the free cash but going forward, those are a little less, note that they're not going to be as much...

Thomas L. Schilling

Yes. If you look at the bonus payments, for example, I think minus that, the CapEx was only about a $4 million, $5 million impact. So minus that the adjustment, it would have been more like the mid-60s.

Operator

We'll go next to Julio Quinteros with Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Just real quickly on market share and market share shifts, just looking at one of your competitors reporting today some favorable market shares and is there any way for you guys to kind of characterize where you are in terms of overall market share on the origination side of the business? And then maybe also thinking about the default side. Any updates you can kind of share there in terms of overall market share there today?

Thomas L. Schilling

On the Origination Services, obviously, it depends on where you -- how you divide it up. If you look at the origination market in total, we're rather small. But when you look at centralized refi, we would estimate our share somewhere around that high-20s to up to 30% market share at the centralized refi market.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay, okay. And then what about the default side? Any way to think about the market shares there now just given all the changes in volumes overall?

Thomas L. Schilling

Yes. It's very difficult to try and measure that. What we do is we really look at it at a state level where -- and by a service line level. We are pretty -- we are comfortable that over the last 6 to 9 months, we really haven't lost any substantial market share. It's really been more an issue of -- other than places where we've had stepped away from contracts, as we mentioned, about whether our margin and risk tolerance level. But other than that, we haven't lost any market share that we measure within the Default Services. It's really an issue of where we compete and how impacted those areas are by some of the state and federal regulatory issues.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Got it. And maybe just thinking about the follow-up on some of the questions about TD&A and the continued expansion of that part of the business. As a percentage of revenues and percentage of profits, any thoughts from an adjacent markets perspective on other areas that you guys can go with the TD&A sort of platforms you have, the workflows and the processes to maybe expand into adjacent markets at this point, to continue to diversify away from some of the stuff going on in default just thinking about maybe either adjacent markets or international expansion plans. Any other ways, I guess, really to deploy capital to think about other growth drivers for the model?

Hugh R. Harris

Yes. I mean, I think first and foremost, we see a tremendous amount of opportunity ahead of us in the mortgage space. Our technology and data-driven solutions have never been in higher demand and so our focus is going to be towards that sort of our core knitting, certainly in the nearer term. I think in the longer term, I wouldn't want to speculate about other adjacent markets we might get into. I think we have our hands full basically fulfilling the opportunities we see in front of us.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay. So still enough there to feel, make you guys feel guys comfortable about the growth potential overall?

Hugh R. Harris

Yes.

Thomas L. Schilling

Yes.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay. And then just lastly, in the -- what's left on the legal side, then, at this point to sort of close the book on that chapter, finally?

Thomas L. Schilling

Obviously we're -- as Hugh mentioned, we're continuing to go through the Consent Order process. So that is still there. Obviously, as we announced with our state AG settlement, we did not announce -- or we did not settle with the State of Nevada. So that still remains there. And our suits with the FDIC also remains in the legal reserve. And I think that’s it.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Does that include the U.S. AGs as well? The U.S. Federal AG?

Hugh R. Harris

The DOJ we settled in the first quarter for $35 million.

Operator

We'll go next to Greg Smith with Sterne Agee.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Looking at the Default Services revenue, can we think about that being at the bottom now just in the sense that going forward, should it track foreclosure starts and the other part of that question is are you done with all the pruning as well? So hopefully, you can get me -- hopefully you get the vein of my question there.

Hugh R. Harris

Yes. I think, Greg, how would I answer that? Whether we're at the bottom or not, I don't think we can predict. But I think we're very comfortable where we're positioned with the default business. And these guys have done a great job of managing for profitability in this following environment. And I think as we go through this period, if it picks back up, we'll be well-positioned to take advantage of it. And if it stays at this level, we'll continue to manage and have good profitability out of the business.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

So you're pretty much done with all the pruning at this point?

Hugh R. Harris

Yes, I say we're pretty much done with all the pruning. I mean there may be some things on the fringes that I'm not aware of as we sit here but the restructuring and everything we've done and the margin improvement we've seen because of that is done.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then shifting gears, just what's your latest thoughts about the potential -- well, some of the sales we've already seen of servicing rights and the potential for more and any kind of negative impact on LPS. And then the second part of that question is what's the opportunity with the special servicers like Nationstar, et cetera, going forward to?

Hugh R. Harris

Well, I think, with Nationstar, we've established a great relationship. We've installed our desktop there as well as our LendingSpace platform. Both are performing very well there. Met with their CEO recently and had a great visit with him and he was very comfortable with everything we're doing on that front. So I think the opportunity to do more there, hopefully is open because of the performance in the past. The sales of the mortgage servicing rights, as you know, Bank of America has led that and they're not on our platform. So it's been an opportunity for us to pick up servicing in on several fronts because of who is buying the servicing. Obviously, if Ocwen buys it, we don't have a shot at that right now. But all the other buyers we're pretty much working with, in one way or another. Wells Fargo, at least what I'm understanding is, is that their sales, they're planning on just selling the servicing rights and maintaining a sub-servicing arrangement on that, which will continue to be good for us.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then last question. Just as we look at the Origination Services revenue and obviously try to model that out, is there a way to think about how much of that is HARP-related? I guess that's the first question?

Thomas L. Schilling

Within our platform, we would estimate that roughly half of our volume is coming from HARP in -- currently.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

And is the HARP volume -- is that tend to be consumer-driven or is it more the banks alerting the consumer?

Hugh R. Harris

I think both, yes.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. So it's a two-way street?

Hugh R. Harris

Yes. The banks continue to reach out.

Thomas L. Schilling

I'd say the vast -- I'd say the biggest effort there though is by the bank. The banks have put a lot of effort into reaching those borrowers who are HARP eligible with varying degrees of success in doing so. But they've -- there's been a lot of effort deployed to try and find everybody who's refi eligible and get them into a better loan.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Yes. Well, that just begs the question that you keep -- you're saying there's still a significant number of loans that are HARP-able or whatever and yet, they haven't been refi-ed. What makes you think they actually will be if the banks are already kind of aggressively alerting customers?

Thomas L. Schilling

Well, I'd say it's an ongoing effort. And I think the banks they continue to reestablish their inventory of loans that they're going to work on. So I think it's -- they still -- the banks that we're working within our centralized refi operations continue to be pretty confident that they're going to continue to have a lot of HARP activity for the remainder of the year.

Operator

We'll go next to Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

It sounds like you're continuing to be optimistic about the refinance market. How should we think about the total origination market for '13? And if you could help us just understand a cross purchase versus refi? And then just remind us of the economics of the HARP versus a traditional refinance would be helpful.

Thomas L. Schilling

Yes. I think we're -- our view is, and as we said we're a bit more optimistic particularly on the refi side. But we see that refi market is going to be -- the refi market in 2012 was around $1.2 trillion to $1.3 trillion, depending on the measure. We expected to be down from that this year but still at elevated levels. And the purchase market from all indications looks like it's probably going to on a path to grow somewhere between 15% to 20% or even better in 2013 over 2012 levels.

Kevin D. McVeigh - Macquarie Research

Okay. And then just the economics on HARP versus kind of traditional refinance?

Thomas L. Schilling

Very much the same in terms of the title and close but obviously, as we mentioned, HARP refinancings did not require appraisals so we have seen sort of our appraisal business not following the overall metrics of the business because of the HARP impact.

Kevin D. McVeigh - Macquarie Research

Got it. And then just as you think about the vision, I mean, you're doing a real nice job kind of managing the runoff, kind of default origination. How does it look in terms of the contribution across TD&A versus default origination as you think about it, kind of 2014 into ‘15? As a 100%, what does the business look like across those 3 segments, just directionally?

Hugh R. Harris

Directionally, I think -- look, I think the 2015, I think we're going to continue to see our growth efforts behind the technology and data-driven solutions. And I don't want to really predict -- I barely want to predict next quarter on Transaction Services, let alone 2015. I think that it remains to be seen in terms of how the default volumes shape up over the course of the next couple of years as well as what interest rates do and how the economy recovers to drive housing.

Kevin D. McVeigh - Macquarie Research

Understood. And then just one last. The seasonal uptick in default in Q2, what's the main driver behind that?

Thomas L. Schilling

Basically, springtime is when we have a lot of grass cuts on property maintenance. So it is a rather sizable impact in the second quarter that we did expect.

Operator

And we'll go next to Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I guess the first question, I have a very similar question to Greg Smith on the Default Services side, but kind of looking at it, the silver lining here is that it feels like the levels are more back to like 2005, 2006 levels. So assuming those, 3.2 million seriously delinquent loans do not flow-through aggressively, I know we get back to sort a more normal, sort of delinquency statement foreclosure state. Is there any way to think about what the bottom and sort of the base line default revenue could be on a quarterly basis?

Thomas L. Schilling

If you go back and look at, you basically got to form an opinion, Glenn, around what you think default rates are and whatever the new normal environment is. Clearly, when you think about what the bottom is, we're not going to -- the bottom in default will not be reached until we have a normal inventory. And I don't think anybody believes that 3.2 million loans in seriously delinquent statuses is normal. And so I think as you look out 2, 3, 4 years as that essentially gets worked off one way or another, I think the ongoing delinquency rate and default rate and foreclosure rate will certainly be -- or the activities in there will be lower simply because the inventory will have subsided.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

All right. Different direction, the Transaction Services margins which -- and you're still at your 20% kind of goal but did decelerate 300 basis points. Are you comfortable staying at that 20% level or should we be thinking about margins recovering as you sort of right size the business?

Thomas L. Schilling

What we're -- what we said is our goal is to maintain a minimum of about 20% on EBITDA margin and we're working -- I would say the answer is we're not satisfied. We're going to continue, as Hugh mentioned and I have mentioned in our prepared remarks is that we're focused on reengineering the business to get more efficiency as we have to adapt to the changing volumes. And we will do so, hopefully, and see some better margins in the future as opposed to where we were in the first quarter. But certainly, our commitment is to try and do everything we can to maintain that 20% level as sort of the minimum level.

Hugh R. Harris

We're making some significant systems enhancements for the default business as well which should begin to kick in second half of the year.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just maybe you could help us directionally thinking that the relative EBITDA margins for OS and DS?

Thomas L. Schilling

The -- yes. Origination Services, obviously just because of the scale and the volume characteristics that we're in right now, the market conditions is obviously providing more of the margin today than Default Services is. Default Services are -- as they are kind of reengineering their cost structure too. Admittedly, what is a pretty sharp reduction, a very quick and very sharp reduction volumes on the default side.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Is that a lot closer to look at 25% margin level?

Thomas L. Schilling

Yes. I mean, look, I'll just put it -- it's a higher margin on the OS side than on the DS side. That wasn't the case 2 years ago when it was, when the shoes were on the other foot, so to speak. So it goes a little bit to that counter cyclical nature of our business in the Transaction Services side. So right now, we're getting some balance by having larger margins on the Origination Services while we're retooling to recover on margins on the default side.

Operator

And with no further questions in the queue, I'd now like to turn the conference back to Hugh Harris, CEO, for any additional or closing remarks.

Hugh R. Harris

All right. Well, thank you for your time. Again, we're pleased with our first quarter performance and with the opportunities ahead for LPS. Our entire team is focused on executing our strategies to deliver superior Technology, Data & Services to our clients and value to our shareholders. We appreciate your interest in LPS and look forward to continuing our dialogue about our company's progress. Thank you.

Operator

And that does conclude today's presentation. We thank you for your participation.

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