The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( MagicDiligence) -- Lender Processing Services ( LPS) is the largest mortgage processing provider in the U.S. The company offers services that cover the entire span of a mortgage loan, from origination through service of existing loans and even handling defaults. Examples of services provided include title search, closing, lien recording, appraisals, flood zone certification, foreclosure, property inspection, and so forth. LPS was spun off from Fidelity National Information Services ( FIS) in 2008 and has an attractive business model. LPS is an outsourcing solution for lending institutions, primarily large banks. Revenue is dependent on the volume of mortgages coming through the pipeline. One nice thing about the business is how it is set up to thrive during boom or bust periods for real estate. When the housing market is strong, LPS earns increased business on its loan origination services. When it is extremely weak, mortgage default volumes skyrocket and LPS earns the dough providing foreclosure and other end-of-life functions. LPS also has an attractive Technology, Data, and Analytics segment, about 10% of the business, that provides software, data management, and analytical services to lenders. Follow TheStreet on Twitter and become a fan on Facebook. There are three things I really like here. One is that LPS has a fairly consistent revenue stream. While mortgage origination, refinance activity and foreclosures will obviously ebb and flow in a normal market, there is a predictable channel of activity instead of a heavily cyclical boom-and-bust behavior (the last three years are a historical aberration). Second is that LPS has high switching costs. Once a lender decided to utilize LPS for services, switching away can be costly and difficult. Third, and related, is that LPS has an outstanding competitive position, with its technology handling over 50% of residential mortgages by volume and processing about 80% of foreclosures.
This regulatory uncertainty was compounded in July with the surprise resignation of former CEO Jeff Carbiener for health reasons. On top of all this regulatory and management uncertainty, second-quarter results came in worse than expected, with a wave of panic selling sending the stock under $15. It is back up to $19 today, and still looks like a pretty good buy. One thing should be clear, though -- this is unlikely to be a breakout stock any time soon. The solid third-quarter results were on the back of a short-term wave in refinancing activity that is unlikely to repeat. The Morgage Bankers Association predicts originations to decline 23% and refinances to fall 37% in 2012. Foreclosure activity has slowed to a halt pending the completion of the consent order. The coming year, 2012, looks to be difficult, especially the first half. Legal issues look manageable, but will remain an overhang on the valuation for some time.