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Lender Processing Services, Inc. (NYSE:LPS)

Q3 2011 Earnings Call

October 26, 2011 8:00 AM ET

Executives

Parag Bhansali – EVP, Corporate Development

Lee Kennedy – Chairman, Interim President and CEO

Thomas Schilling – EVP and CFO

Hugh Harris – President and CEO

Analysts

Carter Malloy – Stephens

John Kraft – D.A. Davidson

Glenn Greene – Oppenheimer

Greg Smith – Sterne Agee

Kevin McVeigh – Macquarie Research

Dan Perlin – RBC Capital Markets

Presentation

Operator

Good morning and welcome to LPS Third Quarter 2011 Earnings Conference Call. Joining the call today are Lee Kennedy, Executive Chairman; Hugh Harris, President and CEO; and Tom Schilling, CFO. They will be using a slide presentation to facilitate today’s review of third-quarter results and guidance for the fourth quarter, as well as some qualitative comment about full-year 2011.

The slides are on the company’s website for easy reference. The discussion today will contain some references to non-GAAP results in an attempt to provide a more meaningful presentation and comparison to prior period financials. Reconciliations between GAAP and non-GAAP results have been provided in the earnings release, which is available on LPS website.

At this time, the company reminds you that some of the comments made on today’s call will contain forward-looking statements. These statements are subject to various risks and uncertainties as described in the earnings release, 10-K and other filings with the SEC. The company expressly disclaims any duty to update or revise those forward-looking statements, including quarterly guidance.

With that, I’ll turn the conference over to Mr. Kennedy.

Lee Kennedy

Thank you and good morning, everybody. Thanks for joining us today.

I first want to say that we are very pleased with the progress that we have made over the last 90 days, and with our third-quarter financial results. Tom will cover the detailed financial results in a few minutes, but revenue and EPS came in stronger than expected for the quarter.

In my last quarter call, I have reviewed my four most important priorities in my role as interim CEO. First and perhaps most importantly, we wanted to complete the search for a new CEO. Then I will cover more on that in just a moment. Second we wanted to ensure that our customer relationships were maintained and secure. Third to work towards speeding up the resolution of legal and regulatory issues and finally to make sure that we are operating LPS as efficiently and effectively as possible.

Our financial and operating [ph] performance in the third quarter demonstrate that we are making good progress with all objectives. Our key customer relationships continue to strengthen and grow, and Tom will provide more detail on this later in the call. We have also made good progress in working towards the resolution of our legal and regulatory challenges, and most importantly we have successfully recruited an outstanding chief executive officer to lead LPS. In conducting this search, our board was committed to taking as long as necessary to find the best executive to lead our company.

We thoroughly vetted over 20 interested and talented candidates. Each were evaluated on a number of important criteria, including industry knowledge, experience as a CEO of a successful public company, familiarity with the regulatory and compliance challenges facing our company and our industry today, knowledge of our customers and prospect base, and the candidate management philosophy and the leadership skills. Hugh Harris was our unanimous first choice, and we are pleased to have him head up our leadership team.

I have worked with Hugh in the past, and I continue to be impressed with his leadership skills, industry knowledge and strong commitment to excellence, and most importantly results. Our board of directors and the entire management team are excited to have him leading our company.

Before handing the call over to Hugh, I wanted to take a moment to thank LPS management for all the support and hard work during this transition period. I now have even a greater appreciation for talent, integrity and professionalism of our leadership teams, and I’m confident that LPS is on the right track and that it will play an increasingly important role in the future of the mortgage industry.

And now I will turn the call over to Hugh.

Hugh Harris

Thanks Lee, and good morning. As I have only been here a few weeks, Tom is going to discuss the details of our financial results and business highlights this morning. But I did want to take a couple of minutes to introduce myself and my plans for the future.

First let me say I’m very excited to be at LPS. I would not have joined LPS if I did not believe it was still a very strong organization with significant opportunities in the future. I know you have all seen the announcement about me joining the company, so I won’t spend a great deal of time discussing my background. I have been in the mortgage industry for more than 30 years and I have served in several senior level positions at publicly traded companies. So I will understand the need to ensure that we deliver a clear message to you that you can understand our business.

For the past few years, I have been actively working in the industry as a consultant, and I am very familiar with the changes that have taken place in the mortgage industry. I have also followed the progress and changes at LPS. Although the company faced a difficult economic environment when they spun off from FIS in 2008, I was very impressed with the growth and success the company achieved in that difficult environment. But I’m also well aware of the challenges it has faced since then.

As I said earlier, I have been here for just over three weeks, and I’m still doing my analysis, meeting with the management teams, asking probably too many questions, and working with our executive team to set a direction for our future. The management team here is very strong. They know our customers, they understand our customers’ business challenges, and they have built great customer relationships.

We also have great products and services that meet significant needs in the industry that will help move the industry forward. I recently had an opportunity to meet with many of our largest customers, and I was very pleased with the positive feedback from each of them about our products, our management, and the support we provide. I am focused now on ensuring our progress continues to deliver value to our clients and support integrity in the mortgage process.

Also I am committed to making sure our organization is structured, so that we are best able to take care of our clients and the company, and deliver the return our shareholders expect from us. My top priorities over the first 90 days are first to complete my review and assessment of LPS current business operation and structure to ensure we are focused on the right businesses, and best opportunities, and that we have the right people in the right positions to execute.

Secondly to work closely with our chief risk officer and our legal team to focus on the regulatory and legal challenges. And third, ensuring that the positive story of LPS is being told. I’m convinced that LPS’ technology and business solutions will help the mortgage industry address the challenges it is currently facing and be a catalyst for defining its future.

Finally, we began to develop our longer term strategic plan and ensure all of our LPS resources are in alignment with that vision. It will clearly be a very busy few months, and I and the management team have a lot of work to do, but I am determined that LPS will start 2012 with a clear vision and with the correct resources to execute that vision.

Now I will turn the call over to Tom, who will review the third quarter results in detail, and I look forward to meeting with many of you in the near future. Tom.

Thomas Schilling

Thank you and good morning. I will discuss the third quarter operating results, including segment results, trends, and guidance for the fourth-quarter. I will then give a brief update on our progress on the consent order before taking a few questions.

While our overall operating environment continue to be very challenging, our results were better than we expected going into the quarter for both revenue and earnings. In part that was due to lift in our LFS segment as interest rates dropped to historical lows and drove an increase in refi activity. The increase in LFS was partially offset by decline in our default services revenue, as foreclosure activity continues to be delayed.

As previously announced, during the third quarter we refinanced our credit facility and completed the sale of non-core operations within our real estate group. As a result, our third-quarter financial results included a charge totaling $0.08 per diluted share consisting of the write-off of certain debt issuance costs, and loss on disposition of the non-core operation.

As shown on slide 5, including these charges we reported net income of $40.5 million in the quarter or $0.48 per diluted share. My remaining comments regarding third quarter operating and financial performance exclude the impact of these charges identified in the GAAP to non-GAAP reconciliation provided in our earnings release.

On slide six, you see that revenue in the third quarter grew about 4% over second quarter to $532 million. On a year-over-year basis revenue declined 14% largely due to significant declines in both mortgage origination and foreclosure activity. EBIT was $90 million, a decline of 38% year-over-year, but a 4% increase sequentially, as shown on slide seven. In addition to the steep declines in both origination and default transactional volumes within our LTS segment, the year-over-year EBIT decline was primarily driven by higher legal and regulatory expenses, and non-recurring revenue deferral adjustments that reduced our third-quarter revenue and EBIT within other TD&A.

Third-quarter adjusted EPS was $0.59 and exceeded our guidance range of $0.53 to $0.55 per share. On slide eight, adjusted free cash flow for the third quarter was very strong at $77 million compared to $58 million in the year ago quarter. The increase in cash flow year-over-year was largely due to improvements in working capital within the LTS segment.

During the quarter we paid regular dividends of $8.6 million, our debt increased by $30 million during the quarter in conjunction with the refinancing. Our cash balance at the end of the quarter was $84 million and we have $283 million available under our revolving credit facility. Our outstanding debt balance as of September 30 was $1.26 billion, or 2.5 times our trailing 12 month EBITDA.

The average interest rate for the second quarter was 4.9%, and the average interest rate at the end of the quarter was 5.3%. We were very pleased to successfully complete our refinancing effort in August, which has provided us a very solid capital structure for LPS. The new senior secured credit facility is providing us with enhanced liquidity, extended our maturities, provided additional operational and financial flexibility under the covenant, and it has secured an attractive long-term cost to capital.

I will now turn to our performance within our key business segments. In the third quarter, TD&A revenue grew about 3% year-over-year fuelled by growth in both mortgage processing and other TD&A. Mortgage processing revenue was up 4% year-over-year as increased professional services fees, and higher usage on our core servicing system drove approximately $4 million of incremental growth.

We recently completed one of the largest and most complex projects in the industry for one of our clients, which speaks to our technology and implementation services capabilities. This project which was completed in October resulted in higher service and technology revenues in the third quarter. We also recently completed the conversion of 400,000 loans from a competitor’s to the MSP platform, as there continues to be a flight to quality for servicing technology.

Other TD&A revenue grew 2% compared to the year ago quarter, with modest growth driven from the full quarter of the latest desktop implementations, and the increase in incremental billable transactions, offset by a $6 million revenue deferral adjustment. The remaining growth is attributable to the acquisitions of True Automation and PCLender, which were completed after the third quarter of 2010.

On a sequential basis TD&A revenue was up by 1.5% compared to the second quarter. Mortgage processing was up 3.5%, while other TD&A was flat in large part due to the desktop deferral adjustments. TD&A EBIT declined 8% compared to the third quarter of 2010, largely a result of the desktop deferral, higher implementation related expenses related to Empower and our non-recurring termination fees in mortgage processing in the year ago quarter.

Sequentially EBIT increased 6% primarily due to the higher usage of our core servicing platform in the mortgage servicing segment, or mortgage processing segment. LTS revenue increased 21% compared to the third quarter of 2010, driven by a 15% decrease in LFS and a 25% decrease in default services revenue. The 15% decline in LFS revenue outperformed the industry metrics. Overall originations declined an estimated 23% year-over-year and refi originations declined 31% according to the latest MBA stats.

Sequentially LFS revenue grew 24% compared to MBA estimates of 7% for the overall origination market and 13% for the refi market. Our third-quarter default services revenue declined 25% year-over-year and 5% sequentially, as foreclosure delays continued to impact this segment. Once again we continue to outperform the market year-over-year as RealtyTrac reported a decline in Notices of Default of 27%. Sequentially RealtyTrac reported an increase of 14%, which was driven in large part by a large release of referrals by one of the largest banks that also utilizes their own in-house default capabilities for the vast majority of cases.

Normalizing for this, the rest of the market declined about 5% sequentially in line with our results. The current inventory of seriously delinquent loans as of August 31 is reported at $4 million by the LPS mortgage monitor. The average delinquency age of those loans remained at over 500 days or nearly a year and a half. We continue to believe that the foreclosure delays represent a deferral of revenue and not a permanent loss. About 40% of the 4 million seriously delinquent loans have been delinquent for more than two years.

At this juncture, we see no other reasonable alternative for dealing with those loans outside the foreclosure process. LTS EBIT declined 37% compared to the prior year -- to the prior year quarter attributable to lower volumes within LFS and ongoing legal and regulatory delays of foreclosure activity.

Corporate and other expenses were $34 million in the current quarter, with about 9 million of that related to consent order and other elevated legal and regulatory costs. To summarize, our third quarter financial results were positive as we grew both revenue and EBIT by 4% sequentially. As the broader industry remains in prolonged turmoil, we continue to outperform industry metrics through strong customer relationships, and disciplined cost management practices.

Now I want to update our guidance for the fourth quarter as shown on slide nine. Due to the continued sluggish default volumes, along with seasonal foreclosure slowdowns, we expect consolidated fourth-quarter revenues to range from $510 million to $520 million. We expect adjusted EPS to range from $0.57 to $0.59 per share. The EPS guidance that I will let you know includes the increase in interest expense from our refinanced credit facility. And we expect adjusted free cash flow to be in the range of $60 million to $70 million.

In addition as Hugh mentioned, we will continue to review our business portfolio and organizational structure over the next several weeks. This review may result in additional restructuring charges in the fourth quarter as we position LPS for a stronger performance in 2012.

Before opening up the call for questions, I want to provide a brief update on our progress on the consent order, which we entered into with the Federal regulators on April 13, 2011. As a reminder, the results of the consent order are confidential, so we can only comment on the progress and cannot comment on any findings or specific observations. The consent order had three major distinct phases. The first phase was the development of enhanced plans for board oversight, compliance and internal audit.

The second phase was the risk assessment of our default related businesses to be performed by an independent third party. These first two phases have been completed, and we are awaiting feedback from the agencies. The final phase of the consent order is the review of documents executed through our default services segment since January 1, 2008. The independent third party and the agencies are actively discussing the document review process and we are awaiting approval for the process for the agencies.

Once the plan is approved, we expect the document review process to last well into the first-half of 2012. While the consent order process has been lengthy and costly, through the third quarter it has cost us over $10 million. At the conclusion of the process, LPS will be the only provider of technology and services to the mortgage industry that has undergone the same thorough examination as the 14 largest servicers. We believe this will serve us well as the industry moves forward, and with new regulations and new servicing standards. And we believe that this will only strengthen our relationships with the largest servicers as LPS delivers the technology tools necessary to meet the demands of the industry.

LPS has introduced several products recently that help the industry make better decisions and increased compliance. The LPS loan quality gateway introduced earlier this year is a technology that provides or that gives lenders the ability to accumulate the critical underwriting document and present them to investors for review and approval prior to the loan being funded. This will provide more transparency to investors, and reduce put back risk on the lenders. We have developed loan quality gateway using our RealEC technology, which is already connected to the vast majority of the industry’s servicers and solution providers.

Another example is LPS’ distressed asset review product, which gives servicers a better way to provide valuations for homes that are in default or foreclosure. These valuations have traditionally been derived through broker price opinion, and creates subjectivity and consistency that provide challenges for default servicers. The LPS distressed asset review uses our AVM technology, and then incorporates a real estate professional’s property condition report to provide some more reliable and consistent value.

It also provides detailed market analysis and forecast on foreclosure and REO activity in a specific neighborhood. Industry-leading technology tools like these are the reason LPS continues to enjoy very strong relationships with the largest originators and servicers. While our overall year-to-date revenue has declined 11% compared the same period in 2010, revenue from the top 20, or the 20 largest mortgage originators has increased 4% with the top five increasing about 6%.

Offsetting this strong revenue performance is the revenue decline of about 26% among mostly sub-prime and smaller servicers. As we look to the future of the mortgage industry, we are very happy with our position with the originators and servicers that will lead that future.

Now I will turn the call over to the operator and open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) We will have our first question from Carter Malloy with Stephens.

Carter Malloy – Stephens

Hi guys. Thanks for taking my questions. So first just want to go back over to the consent order, as well as any of the particular AG cases that are out there. It sounds like you are pretty well into them. You know, I know you can’t give details, but can you give us at least a sense of how you are feeling about the resolution of those issues, and ultimately any potential outcomes or business impacts?

Hugh Harris

As Lee said, at opening up the call, and I outlined in my prepared remarks, the consent order is continuing to progress. It is taking sometimes more time than we would like, but it is continuing to progress. And the discussions with the state AGs is also continuing to progress. Obviously we can’t get into a lot of details on that, but we are very happy with the progress we have made over the last 90 days in starting the process bring that to a head.

Carter Malloy – Stephens

It so sounds like you are feeling better now than you were 90 days ago?

Hugh Harris

Yes, I think so.

Thomas Schilling

Yes, I think there is more clarity now than there was 90 days ago. So the moment is good. We feel good about where we’re now positioned.

Carter Malloy – Stephens

Okay, and Tom on building your 4Q guidance, can you give us a little inside as to your approach there, so much volatility in your end markets, just curious how you take into account all the various macro effects, as well as any potential impact from [inaudible] or even a potential AG push down refi program?

Thomas Schilling

Yes, first of all on the last part of your question, we in our fourth quarter guidance we are not putting anything explicitly in there for potential harp or what the outcomes of that may be. So that would be, if those develop in the fourth quarter that would be something that may alter where we think the quarter would end up. But in terms of just where we sit today, obviously there is always a bit of a seasonal downturn in default related services. There is usually holiday moratoriums and such on foreclosure starts in the fourth quarter that has generally affected the fourth quarter and the industry.

In addition to that, we still expect a lot of volatility, and continued delays on the foreclosure volumes. So we’re looking at defaults being very frankly hard to predict, but continue to be volatile as we go. On the LFS side, on the origination side, you know if you look at the MBA, they are expecting overall volumes to be down in the fourth quarter, refi to be essentially flat. Our view is that we actually expect probably refi activity to be down slightly from the surge we saw in the third quarter.

Then when you get into the TD&A, obviously we are kind of expecting the same kind of performance as we have seen in the past couple of quarters on the both MSP as well as the other TD&A.

Carter Malloy – Stephens

Very helpful, thanks, Tom and then lastly just on the core [ph] going forward, how you are thinking about that into 2012?

Thomas Schilling

Yes, I think you know going into 2012 as I said we think this document review process is going to last well into the first half of 2012. So, our expectation right now is that corporate level of expenses will continue to be at the elevated level you saw in the third quarter for probably the next couple of quarters.

Carter Malloy – Stephens

Okay, thanks.

Operator

We will go next to John Kraft, D.A. Davidson.

John Kraft - D.A. Davidson

Good morning gentlemen. Congratulations Tom on the process so far and welcome Hugh.

Hugh Harris

Thanks.

John Kraft - D.A. Davidson

I guess I just first wanted to follow up on the harp comment, one of the changes that obviously is being worked into the system is the streamlined appraisal process that would allow more ABS at the expense of full appraisals. Clearly I guess presumably that would be a lower revenue item for you, but can you talk about how it might affect the bottom line?

Lee Kennedy

Yes, I think, as you mentioned it would be -- they are talking right now I think, first of all we all have to step back, there is still, I think there is a lot of details that have to develop about whether this actually becomes a reality, but in the way it is framed currently, I think that it probably would be a lower revenue if they go with the kind of the low dock loans, but we would still participate in that, and our margins on that appraisal business on the ABMs is actually higher margin, but lower revenue.

John Kraft - D.A. Davidson

That also would be incremental to what you have already built into?

Lee Kennedy

Yes, exactly.

John Kraft - D.A. Davidson

Yes, got you.

Lee Kennedy

The harp would be purely incremental at this point.

John Kraft - D.A. Davidson

And then as far as the refi uptick in Q3, operation twist sort of dropped rates there for a bit, it is fairly short lived, but I guess can you talk about the difference in the quarter from what you saw from your larger banks doing some of their proactive portfolio retention refis, which you have discussed maybe was slowing down a bit versus full out refinances?

Lee Kennedy

Yes, I would say from a year-over-year perspective we are still seeing a slightly lower mix of the portfolio retention activity, but from a sequential basis we saw it come back up a bit in the third quarter. So we were helped out there, but it is still I think the banks, the banks have been pretty aggressive on these things, on what has been a very attractive interest rate market for some time. And I think they are nearing the point where there is fewer and fewer opportunities for refinancing on a proactive basis.

John Kraft - D.A. Davidson

Okay, and then just lastly, Tom did you say as far as the AG reviews, you said you were just starting the process, but my understanding was that you had at least sort of a group of them or sort of developed or streamlined process to consolidate them. Isn’t there some of that going on?

Thomas Schilling

Well, I think what I said is that I think we have started on a good process for bringing it to a head. And we are in conversations with a number of the States, and we hope to bring those things to a head sooner rather than later, but I can’t give any assurances at this point. I think you have seen how those top 5 banks discussions with the AGs have gone, and it is not the easiest process to manage, but we are more optimistic today than I think we were 90 days ago that we may have an approach that could bring some of this stuff to a head.

John Kraft - D.A. Davidson

Got you. That is all I’ve got. Thanks guys.

Thomas Schilling

Thanks.

Operator

We will go next to Glenn Greene, Oppenheimer.

Glenn Greene – Oppenheimer

Thank you. Good morning.

Lee Kennedy

Good morning.

Glenn Greene – Oppenheimer

I guess, just the first question I guess for Hugh, and I know it is early and you have only been there a few weeks, but just curious just sort of your early observations, do you sort of feel like you have got the management bench strength that you want or you are kind of contemplating potentially sort of augmenting the bench, and also is there some obvious parts of the business that you are sort of just striking you like, maybe this doesn’t make sense, or other areas that maybe you want to be in that LPS is not in today?

Hugh Harris

Well, I would say from my observations first of all the management team is as strong as I thought it was. When I left here there was a great team in place. They have been additions to the team. I think it really strengthened it significantly, Tom being one of those. So, I would say to you that we have made some changes over the last few weeks. You are probably seeing that in the industry. [inaudible] has picked up a bigger load around the technology side, has picked up the MSP businesses, the desktop businesses.

That's again what I've talked about in putting the right people in the right chairs. Bob Caruso is going to be taking over all of the default businesses for us. Bob has -- he has been working for LPS for a while. He was just in a different role. We have asked him to take this role. He brings incredible strength to that area. The customers are very excited that he is in that role. I think he is going to give us opportunities to grow bring business under control.

And on the legal front and the risk side I am extremely pleased with what I found there. The people are fully engaged. They understand the issues, they are dealing with them. The [inaudible] that runs the risk side has done a fabulous job. My meetings with her have gone extremely well. She is on top of it. She understands the regulatory environment. We've started making sure the culture here is embracing all of the regulatory pieces, and I'm impressed with how much we've already put in place.

You know, we are a technology company and the ability to build these changes, these regulatory changes in this system as we go has been happening and so we are way ahead of the game. So you know, when you look at the different businesses we are continuing in that process. We're actively looking at every piece of it. Some of it we may automate more than we have to date to make it stronger to make sure we’ve got protections in place, but I think there is huge growth opportunities for us in many of these businesses as we get through this regulatory process.

Tom mentioned we're the only one that's really dealing with this and dealing with the consent order, and I can tell you it is making this company stronger by the day. We've got over 200 people inside the company on the technologies front that focus on regulatory compliance changes every day. A lot of our competition don't have 200 people in their company. So we’re way ahead of the game. I'm really pleased with what I found basically to answer your question, much more so than I expected when I walked in.

Glenn Greene – Oppenheimer

Okay, great. And then Tom, a different direction but you made a comment talking about sort of the default growth in the quarter relative to RealtyTrac and I think that was helpful, but I think you called out that maybe one big bank, I think it was Bank of America may have driven the RealtyTrac data up as much as it did Q to Q. Could you just sort of repeat what you sort of were suggesting there, sort of I think you suggested that ex that you sort of would have been aligned with the industry?

Thomas Schilling

Yes, outside of the large bank that as I mentioned has in-house capabilities we -- the market was down sequentially about 5%, which is in line with where our revenue was.

Glenn Greene – Oppenheimer

Okay and then just finally maybe an update on the FDIC appraisal lawsuit kind of where that stands, how you are sort of positioning and what sort of the timeline and process here?

Thomas Schilling

Yes, you know, not a lot of progress at this point. We filed our motion to dismiss in July, and we're awaiting a ruling on that from the US district court in the Central District of California. Our position is really unchanged from the 8K filing that we filed back in May, and we intend to fight it vigorously.

Glenn Greene – Oppenheimer

Okay, thank you.

Operator

We will go next to Greg Smith with Sterne Agee.

Greg Smith - Sterne Agee

Yes, hi guys. Tom, what was the -- in TD&A you mentioned there was a revenue deferral. Can you just walk through that what exactly happened there?

Thomas Schilling

Yes, on our desktop technology which is, you know, about now you know, roughly servicers that represent about 80% of the outstanding loans in the country utilize the desktop technology for managing the foreclosure process. In the late 2010, the GSEs had announced a reimbursement limitation on technology to the servicers of $25. Over the last several months as contracts with our customers have evolved we have effectively from an accounting perspective arrived at the conclusion that there is an implicit $25 technology component of that.

And so we've started deferring $25 of every file that goes across the desktop deferring that over the life of the deferral or I mean of the foreclosure. So what that did is it had a catch-up effect in the third quarter. We are deferring approximately $6 million of revenue and that you know, was a one-time reduction to our revenue and will not occur again. So it's getting all our accounting consistent on desktop because we have various different contracts in place that cover this. So it's now getting everything on a consistent basis.

Greg Smith - Sterne Agee

Okay, so in 4Q though, I mean all things being equal would pop back up?

Thomas Schilling

Yes, and all things being equal we will see an uplift in the fourth quarter because there will not be an adjustment to it.

Greg Smith - Sterne Agee

Okay, and then that essentially hit the bottom line in 3Q. Is that fair to say?

Thomas Schilling

Right. That's fair to say.

Greg Smith - Sterne Agee

Okay, perfect. That helps, and then I guess just a broader question on the foreclosures. I mean, at this point what is it going to take to really get the foreclosures flowing. There is obviously a huge amount of inventory out there like you guys said, ultimate conclusion is it has got to run through the foreclosure process. Are we all waiting for some type of global settlement among all the AGs or is it the consent order. What is it ultimately going to take for this to start flowing in a more rapid fashion?

Thomas Schilling

I think it's a combination of all those things. I think it is getting more certainty about the standards to which the servicers are going to be held, and they understand the rules of the game. And I think the consent order is going to be in our view is still the most important aspect of that, but I certainly the settlement with the state AGs would also provide a lot of clarity particularly in individual states where there is certain delays. You know, each state has its own set of issues that the state AG issue and the consent order I think will be getting clarity around those two things will provide a more normalized flow of the default inventory.

Greg Smith - Sterne Agee

And any guess on the timing of that?

Thomas Schilling

At this point I mean we're you know, I'd say sitting here in October of you know, 2011 we’re well past what everybody reasonably thought it would take to get this thing cleared up. So at this point I don't think it is worthy of making a guess.

Greg Smith - Sterne Agee

Okay, and then just lastly are you guys handcuffed in any way from going after new business whether it is from existing customers, new customers, new product services, is there anything on the legal or regulatory front that is handcuffing you in any way?

Lee Kennedy

No, no, not at all. We're, you know, as we said we’ve rolled out a couple of new technology products in the last few months and we continue to go after you know, incremental business and share of business with our customers. As I mentioned on the you know, when you look at the top servicers, our revenue performance among the largest originators in the industry has been far stronger than it has been among the subprime and some of the other places that have led to the decline. So we continue to fare very well with the top servicers.

Greg Smith - Sterne Agee

Okay, and then --

Thomas Schilling

I would like to add that I think the regulatory environment is creating opportunities for us more so than handcuffing.

Greg Smith - Sterne Agee

Yes, yes, and then I'm sorry I just want to throw one more. On the American home lawsuit that came out within the past couple of months, any comments you can make about that at this point?

Lee Kennedy

You know, just that you know, we believe those claims that American Home brought are all something that should be handled in arbitration and we are currently negotiating this with American Home.

Greg Smith - Sterne Agee

Okay, thanks guys.

Operator

We’ll go next to Kevin McVeigh, Macquarie.

Kevin McVeigh - Macquarie Research

If you could just help us understand how you are thinking about the origination market in 2012, and beyond and any color you can give us on kind of the purchase versus a refi in terms of kind of Q4 and then into 2012?

Lee Kennedy

Yes, and you know, we're not going to obviously get too specific on 2012 but I think right now you know, what we look at a lot is the MBA forecast, and it's probably as good as any in predicting where 2012 will end up. And right now they are predicting you know, overall originations are going to be down about 23% in 2012 with refi volumes declining 37%.

So when you look to 2012 for our LFS segment while you know, we continue to strive and I think if you go back and look at since the spin we have consistently beat the industry metrics, whether it is looking at overall or whether it is looking at refi and we continue to expect that we’ll outperform the industry metrics, but it is hard to see a lot of growth if that prediction comes true. And so I think you're going to probably see that LFS volumes for us would be down next year if indeed the MBA forecast is accurate.

Kevin McVeigh - Macquarie Research

Super and then you know, as you think about the harp obviously there is nothing in Q4. You know, is that something that you think is more of a benefit in 2012 on the refi side or just any additional thoughts on that?

Lee Kennedy

Well, yes I think if I had the handicap but I'd say it's probably more of 2012 issue. It could certainly impact or the fourth quarter if things get finalized sooner. But I think a program of that size that they’re talking about is going to last well into the, at least the first part of 2012 anyway.

Kevin McVeigh - Macquarie Research

Okay, thank you.

Operator

We’ll go next to Dan Perlin, RBC Capital Markets.

Dan Perlin - RBC Capital Markets

Thanks. I want to revisit TD&A for a second. You mentioned within mortgage processing you completed a large program for a client in October, and I'm just wondering is this kind of being followed as a one off or is this more of a trend where your clients are asking to do these types of projects, and so we should be thinking along those lines as we think about that number which has historically been you know, more of a conversion type number. You know, this seems like it has got some incremental projects to it.

Thomas Schilling

Yes, this one, the answer is yes and yes I guess. The -- first of all this one is unique. The one we pointed was unique because what it was doing is taking existing -- a customer who had two sort of different platforms and consolidating those platforms to one. So one, just from an accounting standpoint it meant all the professional services fees that were incurred there were recognized as they were incurred as opposed to deferred and amortized over the contract period.

So just a little bit of a subtle difference on the accounting. But the other side of it is yes, we are going to -- we do -- we are seeing more professional services work. As we’ve talked about our staff of consultants is booked solid and in fact it's hard to keep up with all the requests that our services are requesting for modifications, changes within the technology to help them meet the new standards as they go forward. So I think it is going to continue to be at an elevated level, but the project that we called out was unique.

Dan Perlin - RBC Capital Markets

Okay, kind of housekeeping question, the interest kind of expense level is this where we should be planning in on an absolute level?

Thomas Schilling

I think the rates that I gave on an average you know, as we exited the quarter was about 5.3% average interest rate. That's what I would use going forward in the interest expense in our financial statement there is about $5 million associated with the acceleration of the recognition of debt issuance costs.

Dan Perlin - RBC Capital Markets

Yes, okay. So obviously adjusted for that. Yes, okay. So we would adjust for that and then we use the 5.3. A question for Hugh if I could, you know, you talked about your background in consulting and obviously you probably had a good opportunity to you know, to get a sense of where your clients ultimately now, you know, where their demands and needs and requirements are, and I'm just wondering with you know, with [inaudible] coming to this company what is it that you think LPS has to offer to these clients, you know, understanding your unique background in talking with them from a consulting standpoint?

Hugh Harris

Well, I think Tom bite on a big piece of it just a minute ago about the professional sources that we offer. You know, if any of the mortgage companies that we support would lose their whole staff. We can just about replace their servicing staff overnight with the talent that we have here. So they are looking at us as a trusted advisor and when I talk with companies just a few weeks ago, they really respect the knowledge and expertise here.

The bigger thing is I think all of them are struggling with a consent order and the regulatory issues and they told me to approach in that. You know, they couldn't do what they are having to do without LPS. So I think we're extremely important in their future and we've got to just make sure that we're on top of our game as it relates to all these pieces.

Dan Perlin - RBC Capital Markets

And where did the revenue potentially flow into your model, if we think about your ability to satisfy peoples’ needs on the consent order.

Lee Kennedy

That's largely going to come through, well, I'm sorry, go ahead, finish.

Dan Perlin - RBC Capital Markets

No, no. Go ahead. I'm sorry.

Lee Kennedy

Okay, that is going to come through mostly in MSP in the mortgage processing side on the it will be you know, professional services that is recognized within that segment.

Dan Perlin - RBC Capital Markets

Okay. Got it. All right, super. Thank you.

Lee Kennedy

Thank you.

Operator

(Operator instructions) We’ll go next to Carter Malloy with Stephens.

Carter Malloy - Stephens

Hi guys, just wanted to return to a comment you made towards the end of the call, which was the revenue from your top 20 was up, top 5 was up but everyone else was down 26%. Can you sort of help us on understanding why that is, why that trend has still like that and what you think it will look like going forward?

Thomas Schilling

Well, a couple of things. One, you know, a lot of the revenue from others is you know, we get through, is probably affected by the default more than anything else because some of the revenue that comes in on the default side is coming through trustees, and others and is not necessarily tied back to a particular servicer, but the fact of the matter it is the largest servicer.

So we have very strong technology relationships with better penetration across their entire business, and we -- those are the ones that you know, we focus on the most and the ones that are struggling frankly, servicers who have struggled and those are the ones that have been the biggest catalysts for the decline.

Carter Malloy - Stephens

And I'm sure those larger guys are taking market share has helped as well, but that is part of my question is do you think that their appetite is to continue taking market share or you think that you will actually see that trend reverse a little bit.

Thomas Schilling

You know, that's a good question. I think that's why you know, we have focused on you know, to the extent that these you know, portfolios get pulled off eventually. You know, it's good that they are on our technology because then that technology relationship will we think survive those transitions.

Hugh Harris

I would just answer that too Carter that some of the people we talked with a few weeks ago in the meetings we are in are not the traditional servicers that we've gone after and it is other players that are looking at the market and looking how to get in, and you know, no better way to get in than with MSP as we know from the history here as best servicing system out there, and so the guys that we are talking to who are looking at it are going to be talking to us as well. So the source coming out of the banks and the banks decide to downsize a little bit, is going somewhere. We want to be on top of that.

Carter Malloy - Stephens

Okay, and then here you've given us some great insight as to you know, what you see in the business since being there for your very short tenure thus far, but curious if you could give us a little more color on your difference in approach and you know, and again you've given us a lot already on the call, but any big picture the way you think about the business, and the way you think about the next two or five years at LPS, maybe what is different in the way you are going to run the business versus the way it has been historically?

Hugh Harris

Well, we will need to say first of all I think the business was run very well. It got caught in some of the issues that everybody got caught in, which relates to the big banks and all, but I think the management here was very solid, very impressed with the things that Jeff had done and put in place.

I think what we are trying to focus on now is just restructuring a little bit to get more mortgage banking experience players sitting in some of the chairs. I mentioned earlier Bob Caruso. Bob was doing other things for Jeff and the team before, but now he has taken on a bigger role for us, in an area that has been problematic for the industry. And Bob brings a lot of strength to that, and I think he brings a lot of support from the customer base.

It can’t tell you the number of calls that we have had just in the last 10 days over the excitement of him being there and trying to help them solve their issues. So I guess my philosophy there is to really look at the businesses. we are a technology business. When I left, that was primarily what we were focused on was driving the technology side of the business. So what I want to make sure of is that everything we do, all the businesses we are in and grow is built around technology and technology support. Because it takes the human factor out of the picture a little bit, and to make sure the systems are providing the compliance and controls that we need.

So we just need to take advantage of the technology we have, and the support that we can give to our customers. So, I guess the answer to your question. I don’t know if that answers your question, but philosophically I just want to make sure we focus on what we do well and continue to do it very well.

Carter Malloy - Stephens

Okay, thanks.

Operator

And that is all that time we have for questions today. This concludes today’s conference. And LPS thanks you for your participation.

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