How the Fidelity Merger with LPS Negatively Impacts Independent Land Title Agents
"And when Alexander saw the breadth of his domain, he wept for there were no more worlds left to conquer." - attributed to Plutarch (c. 100 AD)
The world’s largest title insurance underwriter, Fidelity National Financial, Inc. (FNF), is readying to become the largest mortgage technology and mortgage services provider in the United States following a proposed deal in which it would reacquire Lender Processing Services, Inc. (LPS), a former corporate affiliate, for $2.9 billion dollars. The proposed transaction would "create a larger, broader, more diversified and recurring revenue base for FNF."1 (Emphasis added).
1 http://www.bloomberg.com/news/2013-05-28/fidelity-national-to-buy-lender-processing-in-2-9-billion-deal.html (visited September 4, 2013).
As part of the transaction, LPS will then be combined with FNF’s national settlement service operational arm known as ServiceLink to carry lender business activity from origination to foreclosure in a "cradle-to-grave" closed system of business which will help FNF create new revenue from ancillary operations.
Through the transaction, independent land title agents who currently write for FNF and those who do not write for FNF, but compete with them will be challenged to find other sources of business as the largest banks, including Wells Fargo and J.P. Morgan Chase, channel substantially all of their mortgage settlement refinance business to the FNF-created system.
The proposed merger is currently being reviewed by the Federal Trade Commission (FTC) which reviews all major corporate mergers and acquisitions for compliance with federal anti-trust law and, while approval is likely, the deal is being widely panned in the independent land title agent community who sees shrinking markets and disguised national underwriter competition as a threat to their overall survival. More importantly, independent land title agents also understand that the proposed transaction threatens real estate consumers who continue to have less choice at the closing table and little knowledge of the fact that settlement costs will ultimately rise when competition from independent land title agents is closed out of this affiliation. 2
It is a basic axiom of business that competition helps to rein in prices. Without competition, there is no impediment to rising price levels. Eventually, what appears now as consumer discounts – disguised in the form of streamlined refinance pricing (as explained below) -- will turn into higher title insurance premiums and settlement costs. Even without the proposed transaction, rate increases are spreading across the United States.2 The FNF/LPS merger is but another step in the steady threat against independent land title agents allowing the national underwriters to charge their own discounted rates for direct and quasi-direct business while at the same time forcing their independent land title agents to charge twice the streamlined rate and giving them far less market opportunity to reach consumers and sources of business.
2 Rate increases are in process in New York, New Jersey, Ohio, Indiana, New Mexico, Pennsylvania and Texas.
The purpose of this paper is to try to understand the players in the FNF/LPS transaction and understand why this deal is being made. In addition, the purpose of this paper is to help independent land title agents understand why this reacquisition transaction sets the stage for less competition in the industry, higher long term consumer costs and the threat of future extinction for the independent business model.
NAILTA opposes the FNF/LPS merger. FNF and LPS are large organizations that are trying to address the pressures of creating shareholder equity. In that regard, FNF and LPS have every right to seek out the best partnerships that help create positive returns for their respective shareholders. FNF has a long and oft-imitated history of accomplishing these goals. However, the proposed FNF/LPS merger is bad for independent land title insurance agents because it helps to create a closed system of competition in which large national lenders and their national title insurance underwriting counterparts combine to control the flow of business away from independent settlement providers and in such a way that the harms to consumers and the title insurance industry are disguised as short term benefits. The result of a FNF/LPS merger will be less competition in the title insurance industry, higher costs to consumers over a longer period of time and the continued erosion of services that are provided as part of the title and closing experience.
The Proposed Merger and FNF Background:
From a Fidelity National Financial, Inc. (FNF) press release dated May 28, 2013:
Fidelity National Financial, Inc. (NYSE:FNF), a leading provider of title insurance, mortgage services and diversified services, and Lender Processing Services, Inc. (NYSE:LPS), a leading provider of integrated technology, services, data and analytics to the mortgage and real estate industries, have announced the signing of a definitive agreement under which FNF will acquire all of the outstanding common stock of LPS for $33.25 per common share, for a total equity value of approximately $2.9 billion.
Under the terms of the definitive agreement, FNF will pay 50% of the consideration for the LPS shares of common stock in cash and 50% in shares of FNF common stock, subject to adjustment as described below. 3
The purchase price represents a 19% and 25% premium, respectively, to the prior 30-day and 60-day average closing prices for LPS' common stock through May 22, 2013, the last trading day before media reports regarding a potential transaction between FNF and LPS.
At closing, FNF will combine its ServiceLink business with LPS in a new consolidated holding company and sell a 19% minority equity interest in the new consolidated holding company to funds affiliated with Thomas H. Lee Partners, L.P. for approximately $381 million in cash. FNF will retain an 81% ownership interest in the new consolidated holding company.3
3 http://www.investor.fnf.com/releasedetail.cfm?ReleaseID=767454 (visited September 5, 2013)
4 http://www.servicelinkfnf.com/page/aboutServiceLink/history.html (visited August 30, 2013)
7 http://www.lpsvcs.com/LPSCorporateInformation/AboutUs/Pages/default.aspx (visited August 30, 2013)
FNF began trading as a publicly traded stock in 1987.4 Since then, the growth of FNF has been a fascinating example of entrepreneurial risk-taking, timely decision-making and good fortune. In 1996, FNF acquired Nations Title, Inc., the eighth largest title insurance underwriter in the United States, thereby making FNF the fourth largest title insurance underwriter in the country and doubling its existing agency base.5 In 2000, Fidelity acquired Chicago Title, Ticor Title and Security Union making the combined companies the largest title insurance underwriter in the world.6
The formation, sale and reacquisition of LPS is also an interesting tale. In 2003, FNF acquired the mortgage processing services unit of Alltel Corporation, which served as the precursor of what later became LPS. In 2006, FNF spun off its mortgage processing services division as a separate company called Fidelity National Information Services or FIS. In 2008, FIS spun off its mortgage processing services division as a separate company called Lender Processing Services, Inc. (LPS). Five years and $2.9 billion dollars later, FNF announced that it intends on repurchasing LPS and returning LPS to the FNF family of companies.
What is LPS?
LPS is a leading provider of mortgage and consumer loan processing services, mortgage settlement services, default solutions and loan performance analytics, as well as solutions for the real estate industry, capital markets investors and government offices.7 LPS provides basic technology platforms for lenders to process their loan portfolios. Roughly 50% of all mortgages in the United States are serviced in some capacity by LPS. LPS works with the top 50 largest lenders in the United States based upon mortgage volume and supplies servicing solutions to lender clients through the life of an originated loan. Those solutions include the following:
Mortgage: Lenders and servicers use LPS’ comprehensive suite of technology and services which support the entire mortgage continuum from origination and servicing to risk management and default.
Real estate agents, brokers and Multiple Listing Services (MLS): All across the country realtors can use offerings from LPS Real Estate Group, including LPS data mined from the largest proprietary mortgage, public records and real estate databases in the country.
Government: From the U.S. Treasury to county courthouses and municipalities, use LPS information systems to achieve efficiencies and streamline work processes.
Consumer Lending: Solutions from LPS enable lenders to obtain a deeper, more holistic view of their home equity portfolios and a more effective, more profitable risk management strategy with consumer lending solutions from LPS.
Capital Markets: Clients use LPS’ integrated suite of products and services to heighten portfolio transparency and boost investor confidence. With LPS’ solutions, buyers, sellers and investors of mortgages or related securities have what LPS calls the most complete and accurate information on every mortgage pool, down to the individual loan and property. From property valuations and portfolio reviews to reliable data and analytics for prepayment and credit modeling, LPS prides itself on being the single-source provider for capital markets.
LPS also manages to operate their own joint venture title insurance agency known as LSI Local Solutions, or in some states as LSI Agency, Inc.8 LSI acts as a title agent for LPS related transactions and is underwritten by Chicago Title Insurance Company, Fidelity National Title Insurance Company and National Title Insurance of New York, Inc. In this regard, it currently provides LPS with unrivaled access to the largest fifty banking institutions in the United States under the FNF banner.
8https://gateway.insurance.ohio.gov/UI/ODI.Agent.Public.UI/AgentLocator.mvc/DisplayBusinessEntityDetail/54322 (visited September 5, 2013)
9 http://agbeat.com/housing-news/fdic-suing-lender-processing-services-lps-for-154-5-million/ (visited September 6, 2013)
Despite the market jargon and high-sounding promises of service, LPS has had a troubled history since being spun off from FNF back in 2006.
On November 23, 2010, a class action securities lawsuit was brought against LPS alleging that LPS failed to disclose material adverse facts about LPS’ true financial condition specifically relating to actions involving its default service practices. The suit was brought by shareholders of LPS stock. On May 6, 2013, the suit was settled for an undisclosed sum.
In 2011, the Federal Deposit Insurance Corporation (FDIC) filed a lawsuit accusing LPS of negligence and breach of contract demanding $154.5 million dollars in losses on behalf of loans LPS serviced for Washington Mutual Bank (WaMu).9 The FDIC lawsuit alleged that WaMu hired LPS subsidiary LSI Appraisal, LLC (LSI) in July 2006 as its appraisal branch wherein LSI agreed it would "conform to federal and state law, including adhering to Uniform Standards of Professional Appraisal Practice (USPAP)". The FDIC lawsuit alleged that LSI used appraisers who lacked the skill, experience and qualifications necessary to perform the appraisals requested. The crux of the allegations centered upon the belief that appraisals provided to WaMu were "substantially inflated appraisal values."10 5
In February of 2013, the United States Department of Justice (DOJ) announced that LPS had agreed to pay $35 million dollars in criminal penalties and forfeiture to address its participation in a six-year scheme to prepare and file more than 1 million fraudulently signed and notarized mortgage-related documents with property recorders’ offices throughout the United States.11 (Emphasis added). The settlement followed a felony guilty plea from the chief executive officer of wholly owned LPS subsidiary, DocX, LLC, on charges of conspiracy to commit mail and wire fraud.12
11 http://www.justice.gov/opa/pr/2013/February/13-crm-206.html (visited September 6, 2013).
13 http://www.jaxdailyrecord.com/showstory.php?Story_id=538668 (visited September 6, 2013).
14 http://globenewswire.com/news-release/2013/06/10/553057/10035768/en/Lender-Processing-Services-Inc-LPS-Investor-Lawsuit-Against-Takeover-for-33-25-announced-by-Shareholders-Foundation.html (visited September 6, 2013)
15 http://www.servicelinkfnf.com/page/services/origination/technologyProducts.html (visited August 30, 2013).
17 May vary bank-to-bank and state-to-state.
On February 1, 2013, LPS agreed to pay $127 million dollars to settle complaints by the attorneys general of 46 states and the District of Columbia over the company’s role in the allegations of robo-signing foreclosure documents concluding a three year investigation of the company by federal and state authorities.13
Shortly after the proposed merger with FNF was announced, an investor who holds LPS shares filed a new lawsuit to stop the proposed takeover claiming that the proposed purchase price was too low.14 That lawsuit remains pending.
What is ServiceLink?
ServiceLink is the national lender platform for FNF. ServiceLink provides mortgage origination products and services, including appraisal and valuation review, title insurance, closing, escrow and default services.15 ServiceLink also provides software packages such as iClose, which is a web-based closing program that actually allows ServiceLink employees to stand in the shoes of borrowers to execute important loan documents on their behalf through limited powers of attorney.16
ServiceLink is a licensed title insurance agent in every state in the United States and offers reduced title insurance and closing programs for eligible refinance transactions ordered only through ServiceLink. A ServiceLink eligible loan is any of the following:
First mortgage refinance – including HARP loans
Maximum loan amount not to exceed $1,500,000.00.17
LTV and CLTV not to exceed 100%
No cash-out limit.
For loan amounts above $1,500,000.00, traditional filed insurance rates apply
24/7 professional signing agent closings – iClose web-based signings
|To understand the discounted nature of the rates that are charged by ServiceLink through their streamlined refinance programs, consider the following offering that ServiceLink charges U.S. Bank customers in Cincinnati, Ohio: Loan Amount||Title Rates18|
|$0 - $250,000||$320|
|$250,001 - $500,000||$400|
|$500,001 - $750,000||$460|
|$750,001 - $1,000,000||$520|
|$1,000,001 - $1,250,000||$630|
|$1,250,001 - $1,500,000||$750|