Q&A with Hugh Harris: veteran mortgage banker Hugh Harris has been on the job at lender processing services as president and chief executive officer for less than half a year, but he's already getting high fives from staff we got an exclusive interview with him shortly after LPS' 2011 year-end earnings call.
BBMC went through a management buyout and a stint as a private company, before going public as HomeSide Lending Inc. in 1997. HomeSide was purchased by National Australia Bank (NAB) in a deal that closed in December 1997. (Harris worked for NAB from January 1998 2001.)
He served as president and chief operating officer of Home-Side from 1996 to 2000. Harris became president and CEO in 2000 and served in that capacity until 2001, when HomeSide was sold. That was the official end of Harris' mortgage banking career. But later he served as president of a predecessor company to LPS from 2003 to 2006.
At 61, Harris has come out of retirement to run Lender Processing Services during one of the most challenging periods in that company's history. LPS is faced with its own consent order and is fighting foreclosure-related lawsuits as the courts and the regulators discovered its status as a preferred vendor with major servicing clients.
But all this doesn't seem to rattle Harris one bit. His calm demeanor was honed during decades of cycles in the mortgage banking business.
We sat down with Harris on Feb. 17 in Washington, D.C., just a week after the big $25 billion servicing settlement was announced with some of LPS' biggest customers. Our interview with Harris took place the same week his company announced its earnings for all of 2011. So there was big news breaking all around him, but he was cool as a cucumber.
Q: Let's start with the latest LPS earnings and the stock price. The most recent earnings call announcing fourth-quarter and full-year 2011 financial results occurred on Feb. 13. The stock price yesterday, Feb. 16 in just one day's trading--was up by more than 7 percent. The market was clearly responding to something in those results. What was it, and can you take credit for it personally?
A: I cannot take credit for it personally. Let me assure you of that. 1 think the market is pleased with the changes that we've made. We talked about being a "new and improved" company. That's easy to say, but hard to really accomplish. We have made a lot of changes in the management team. We've done a lot of work around the businesses themselves, and have tried to identify which businesses we want to be in, long term. But to answer your question specifically around the stock price, I think more of that's been focused on the fact that we took the $78 million reserve for legal and regulatory issues.
The market's been waiting for us to put a number out there. That number will have to be reassessed every quarter as we go along, but at the end of the fourth quarter, that was our best estimate of what we thought the ultimate cost may be of settling the issues with the reguators on the consent order, as well as the AG [attorneys general settlement] and so on. So, I think, specifically to answer your question, that's been the biggest key.
Q: Do you think there's further upside in the stock price, as people process that number?
A: Well, I hope so! Yesterday was a little bit of a surprise. We did spend the last couple days in San Francisco at a Goldman Sachs investment conference, and a lot of the questions were really directed at management what changes we've made, what we're doing to assist the servicers as they deal with their consent orders. What are we going to do with our own consent order?
I think people are getting more comfortable with the fact that we are addressing the issues and making the changes we need to make, and just moving forward.
Q: In terms of the 50 percent market share of servicing systems that LPS has with MSP [Mortgage Servicing Package], how should the market view that?
A: The 50 percent market share is a positive. It's great to be the leader in technology solutions for the industry. We've been heavily engaged with all of the major lenders--not only the 50 percent that we have a relationship with around MSP, but all of the major lenders.
It has put a little more scrutiny on us, maybe, from a regulatory standpoint, but I personally believe that's a very big positive for us. We've gone through the process of a consent order. We've dealt with the regulators. We've had a very strong team that came in, did a thorough review of the organization, made up of former federal regulators, so they understand the business [and] understand what the regulators were looking for.
One of the things I emphasized when I first came in was we were going to embrace the regulatory changes, and just get up-to-speed as quickly as possible. We've done that, and we've been working very closely with the servicers.
They now have their AG settlement, and there are a lot of requirements in that, that are going to require technology improvements that no one's in a position to do better than we are. So is there more scrutiny? I think, yes, there has been, but that will play to our advantage as we come out of this.
Our goal is to get the stamp of approval from the regulators, so that when the Wells Fargos, and the Chases and others, are looking at the vendors they're going to use, the regulators are certainly going to say, "You need to work with somebody that is compliant." Our goal is to be fully compliant with all the regulations as we come out of this. And it'll give us an advantage, I believe, over our competition, because if you look at the vendors and the service providers, nobody has been through the Iconsent order] process but us.
Q: There are servicing standards that are included in the attorneys general settlement that are still pretty fuzzy. What have you come to learn about the specifics of the changes that are going to be required?
A: A lot of what we have learned [has come] through the process [of talking to our servicing customers].
Since early 2011, LPS has been focused on fixing as we learn. We've built the capabilities around single point of contact, which are not easy. That's much more difficult than it sounds if you're sitting in a regulator's seat. And so we spent a lot of time in 2011 already trying to get ahead of these requirements that are coming out.
To your comment that some of the requirements appear to be fuzzy, I would agree with that. I don't have a lot of clarity around that yet, and I don't think the servicers themselves have total clarity yet.
And again, being involved in our own consent order, we're learning how to do the things the way the regulators want to see them done.
Q: How close is your relationship to the regulators?
A: We have a strong working relationship with the regulators at this point, particularly the ones involved in our consent order. The OCC [Off ice of the Comptroller of the Currency], the Fed [Federal Reserve] and the FDIC [Federal Deposit Insurance Corporation], primarily, have driven the consent order with LPS, But the Fed has taken the lead on our specific consent order. So we're working more closely with the Fed than anyone else.
They've been tough but fair. I think the issues they've raised have been very fair. The biggest thing that has helped us with the regulatory process, is really helping them understand what we do and what we do not do. As it relates to LPS, it was very important for us to help them understand what we do not do. We do not originate loans. We do not service loans. We do not under write loans. We do not foreclose on people. We don't collect payments. We don't do any of those things.
We provide the technology support to the mortgage servicers, to allow them to do all those functions. LPS does not specifically do those things. And that's been a learning process for the regulators, as well as the AGs.
We've been trying also to educate them on the fact that we can help solve some of these problems. A lot of the things that need to be (changed involve] manual processes that need automating. So we're driving as much automation into these shops as we can through our technology. That's really our goal.
We haven't been having any proactive discussions with the regulators on things before they come out, but we've really been coming behind that and saying if this is what you want done, this is how we think we can help you get it done.
Q: How would you. assess the credibility of LPS as an industry player? As good as it's ever been, better than last year or how would you describe it?
A: I think the credibility of LPS is better now than it's been in a while. I think it was damaged in 2010 and 2011, again basically because the lack of understanding of what we do and don't do. The company and the management team have really focused on educating people, as much as anything, as to what we do and don't do. So I would say the credibility today is much stronger than it was maybe a year ago, primarily through the better understanding of the company itself.
Q: In terms of LPS, specifically, when you look at the AG settlement, is it. a net positive or a negative? Or it is a wash? Or is it just too early to tell?
A: I think the AG settlement was a positive for the industry, and therefore a positive for LPS. The fact that the pace (of loss mitigation and foreclosures] is picking up and that things are being closed out, I think, is very positive for the industry and for LPS.
Also, from someone sitting on the sideline watching the bank [servicing] settlement, I was very impressed with the job that Mike Heid [of Wells Fargo Home Mortgage] did in leading that. I don't think it could have gotten done without Mike, lie's got tremendous leadership skills anyway, but I think he really shined in this process with the AG. So all in all, I would have to say the answer is a positive for LPS and a positive for the industry.
Q: Why did you come back to run LPS--at this time, in particular, when the industry's going through so many challenges and LPS is right in the center of it?
A: It's tough to sit on the sidelines and watch an industry that you have spent so many years in get tainted. The mortgage industry is a great industry. It's a very important part of the real estate and housing industry, which is critical to the economy of the U.S.
And having worked at LPS [during an earlier period], I knew all the people and was very impressed with the employees there. We have about 8,000 employees that are totally committed to supporting our mortgage banking customer base.
They were struggling, and I felt like I could help. The board evidently felt I could help. So as we talked through it, I wanted to come in, get engaged and see if there was anything that I could do.
I'd like to think with all of the talent at LPS, both in management and among the employees, that we could help as the industry rebuilds itself..That includes people like] Bob Caruso and Dan Scheuble, who has been running mortgage banking technology for many years.
Q: How much has the industry changed since you were on the mortgage banking side?
A: I've only been back for four months, so the new mortgage banking side is not as clear to me yet, although I see it improving dramatically.
I think the [strengthened] regulatory [component of the business] is going to be good for the industry, long- erm. It will help rebuild the confidence in the mortgage banking industry. All the work being done around compliance, controls, risk, etc, will ultimately be positive for the industry. I think it'll help bring private money back into the industry.
Watching Fannie Mae and Freddie Mac and others, and all the problems that they've dealt with, has been difficult. I think they provided good leadership for the industry for many years, and I personally think they could help bring the industry back.
I don't really see, in the short term--the next three to five years--how the industry comes back without someone like Fannie Mae and Freddie Mac in the mix. Long term, there may be different structures and different ways to put the industry together. But short term, I think the government's going to have to be involved, and I don't think they have a better vehicle than Fannie Mae and Freddie Mac at this point.
We've spent a lot of time over the last few months meeting with both the GSEs [government-sponsored enterprises] as well as the customers, and just trying to see where we can help and what we can do to support the changes that need to be made.
Q: Do you feel there's an understanding inside the administration that these two players are critical and you can't yank them out, or deactivate them anytime soon?
A: I have no clear understanding of what the understanding is within the administration. But there are a lot of very smart people working on the problem--a lot smarter than me. So I'm sure they'll come up with some creative solutions as to how to get it done. I was just saying from my personal perspective, it seems like you need them for the next three to five years--in a big way.
Q: How have the economics of the servicing side of the business and the mortgage technology side of the business changed? Can you still make money in servicing and in industry technology ?
A: From LPS' perspective, the opportunities are tremendous. As we look at the regulatory changes, and the other issues the industry is facing we believe we can help automate a lot or those pieces. So I think, from our standpoint, the economics should look positive going forward.
As far as the economics of the industry, I don't have a lot of clarity around that, but what I hear anecdotally tells me the economics are pretty much upside-down right now. But we've seen this in the past in the mortgage banking space, and the market always adjusts--and it will in this space, too.
There's probably another 12 to 18 months that the industry has to get through, to get their arms around the consent orders, how they operate within [those requirements], and get their arms around the other regulatory changes that will be coming. [Lenders will figure out] how you operate in that environment and how to produce a bottom line for your shareholders and owners.
Q: Are you seeing a lot of new people jumping into servicing right now, or returning to servicing?
A: We are. [Whereas] eight years ago, when I went to work with LPS, we focused on the consolidation [among servicers], because at that time it was pretty clear that big banks were going to own the mortgage space, which they did, and have for the last several years.
That seems to be changing. Some of the banks are beginning to downsize their mortgage exposure, particularly if you look at Bank of America and a few of the other large players.
This time around, as we're taking a hard look at what the industry's going to look like, we're focusing a lot on the new entrants while still making sure we take care of the big guys. A lot of the new entrants coming in are old guys like me, old mortgage bankers that we all know, we have good relationships with, we trust--and I think they're going to be very successful as they come back in.
So we're focused on how do we help support that group, as well as the big banks. A lot of investment dollars are going toward structuring things that work for the new entrants, and I think that's positive for the industry.
Q: So four months in, what's been the steepest learning curve?
A: The steepest challenge for me has been the legal and regulatory side--not as much the regulatory side because I came out of a regulated environment working for banks for many years.
The legal side has been a little more challenging because I've never had that much exposure on the legal side. But I have a really strong legal team. They understand the business very well. They understand the legal requirements and we are in constant dialogue, as much as we can be, with the AG offices, on any of the legal pieces we're dealing with. We've had tremendous success in the last four months with settling a lot of the lawsuits [against LPS].
We had 15 fee-splitting cases against us; 14 of those have been dismissed at this point, so we just have one of those open. We had a shareholder lawsuit that just got dismissed with prejudice last week.
We've moved most of the litigation to arbitration at this point. So all those things are positive, and we've made a lot of progress. But that clearly has been the biggest challenge.
Q: It seems to me like there's just a lot of piling on that's been occurring against the mortgage industry. When do you think the mortgage industry will stop being the punching bag that it's been and another industry will become everyone's favorite bad guy?
A: I do believe that things are getting better. I do think a lot of it, again, stems around education and understanding the industry.
If you look at the mortgage banking industry, no one wins in a foreclosure. So it's not like banks want to foreclose on houses. I think too often the mortgage industry has been portrayed wrongfully, in my opinion, [and people mistakenly believe] that the industry makes money on foreclosures.
I think as people begin to understand better, and I get the sense that [is happening], I think things will calm down. I think the housing industry coming back will help.
I heard Jamie Dimon say this week that he thinks the housing industry has bottomed. I'm not sure I'm quite there yet, but I do think things are improving. At least people are talking with the Realtors[R] and builders. People are out shopping. That's a good thing,
I think it's critical for the mortgage banking industry to be prepared as things start to improve, to make sure that we are in compliance, we are operating in a new manner, with new leadership that understands the regulatory environment and understands how to he successful in that environment.
That's going to require a lot of discipline around the industry that we may not have had over the last few years.
So all in all, I think things are moving in the right direction.
Q: What is the most misunderstood aspect of the whole servicing and foreclosure side of the business?
A: I think clearly, at LPS, we've been misunderstood. That's the reason I pointed out all the things we do not do. So our job has been to educate, as best we can.
The perception from the policymakers and others toward the mortgage industry appears to be that banks are wrongfully foreclosing on people, and if you look at the statistics that come out through RealtyTrac and others, you know, it's clear that there are--the average delinquency, I think, is well north of 500 days.
And as you look at the total number of missed payments that banks have been advancing to investors that they'll probably never recover, the number's probably close to $75 [billion] to $100 billion.
So while people think that mortgage bankers are just sitting back making money on all this, they have tremendous advances out that they'll probably never get back. So there's a lot of work left to be done, in my opinion, and some things were clearly done wrong, but I think everyone is committed to fixing the sins of the past.
Q: Do you expect consolidation to further shrink the number of players on the servicing and origination side? How will that affect LPS revenue growth?
A: I think consolidation is going to be slowed at this time. Bank of America and Cili, and others have announced things they're getting out of, |such as] correspondent lending, which will certainly slow the consolidation. Wells Fargo seems to be committed to continuing to grow in this environment--as best I can tell, they're the only major lender that's committed to significantly growing in this space.
So that's why, at LPS, we're focusing a lot of our time and energy on the new entrants as well as the big banks--because I do think the new entrants are going to take a [growing] share of the market.
We've been very fortunate in this past year to grow [our] market share against a downturn in the market.
So I think LPS is well positioned, whatever direction the industry takes.
Q: In the recent earnings release, you said that LPS is a different and improved company. And you singled out management-team changes. Who specifically are you referring to when you say "the new team "?
A: I mentioned Dan Scheuble. He's taken on a bigger role inside the organization--[he has] 20, 25 years in financial technology, and 20 plus years in mortgage banking. Bob Caruso [has had an] extensive career in mortgage banking. Dan has walked in the shoes of our mortgage banking customers [as have I]. We know what it takes to run a mortgage operation. We know how difficult it is. So we have more of an empathetic view of what they're going through.
I mentioned Bill Griffin [over sales]. Joe Nackashi, our CIO [chief information officer], has taken on a bigger role in the management side, If you look at LPS, our technology has worked in a regulated environment for the last 30 years because we were examined every year as part of the banks' examination.
So Joe clearly understands how to be successful in a regulated environment. There are more changes that we've made to really get the right people in the right chairs. I think we have a good team that's totally committed to doing it right.
Q: Were you on a mission to accomplish any particular things when you took over? Were there any particular things that you felt strongly about in terms of making changes?
A: There were not. I spent a lot of time--the first two months, particularly understanding things that were different about the business now than when I left. And things had changed. You know, I didn't have responsibility for the transaction businesses four years ago that now make up part of LPS.
So it took a while for me to get my arms around the transactional side of the business and understand it clearly. I've gotten a lot more confidence around that space. These businesses that were in the transactional side of LPS were run more autonomously than I would have preferred.
So as I came in, we did do a lot of restructuring there with completing some of the centralization that they'd already started around the financials, the legal side, the compliance side, etc.
That has given me a lot more confidence as to how things are being done there. Bob Caruso's running that piece for me. I've got a lot of respect for him. And he gets it--he understands what we have to do to do it right there.
So the mission, to me, was making sure we were in the right businesses that could make us successful, because you can waste so much of management's time and energy dealing with businesses that don't really make up the core of where you want to go in the future. And that's what I was finding.
We were spending an inordinate amount of time on businesses that really weren't going to help us be successful going forward. So our decision was to get out of those businesses, sell them if we could, and shut them down if we could. So we've done that.
Q: The fourth-quarter earnings release states that the non-core businesses that were discontinued in the fourth quarter generated revenue of $51 million. Can you explain the thinking behind that?
A: It was $51 million of revenue associated with those businesses, but there was a negative $18 million in margin associated with those businesses. So, while, you know, someone would look at it and say, "Why would you get out of $51 million of revenue?" But if you're not making money in it, then you shouldn't be there.
Q: For all of fiscal year 2011, the company reported adjusted net earnings down by almost 30 percent from the prior fiscal year. On a GAAP [generally accepted accounting principles] basis, operating income was down by 50 percent in the just-completed fiscal year, and net earnings were down by 68.1 percent. That suggests a challenging year. So what were some of the bigger drags on operating income and net earnings?
A: It was a very challenging year. I think 2012 is going to be fairly challenging as well. But we gained market share in a down market and, you know, we can't control the fact that refis were down x percent or the fact that notices of default were down.
What we can control is making sure we are getting our share of what's coming through, and if you look at the MBA [Mortgage Bankers Association] projections or the Fannie Mae/Freddie Mac projections for originations for 2012, and originations for 2011, I think things performed differently than anybody expected in 2011.
The good thing is we're a company that had $2.1 billion in revenues in 2011 and $516 million in EBITDA [earnings before interest, taxes, depreciation and amortization]. So while the market itself was down, the company did very well in that environment.
Q: Are you budgeting for regulatory and legal costs to continue to remain at the level that they were in 2011?
A: I do not: see it going down in 2012. If you look at our numbers for 2011--all of our costs associated with legal, regulatory, finance, etc--the numbers were up about 25 percent over the previous year. That number will still be elevated in 2012. But I do anticipate, after 2012, for those numbers to come back down to a more normal level, which all those [costs] together run about $20 million a quarter for us, or $80 million a year.
So 1 expect it to come back down after 2012, assuming that we complete the consent order, which we hope to have done toward the end of 2012, and also work through these settlements with the AGs.
Q: In your 30-plus years in the mortgage business, have you ever seen a period in the industry's history similar to this one?
A: Never. I think the closest thing to this could have been the S&L crisis that we all dealt with back in the early 1990s. Or even going back to the 1980s, when we had the Oil Patch states' problems back in the early to mid-1980s. But nothing on a global scale like this. And we hope to never see it again.
Janet Reilley Hewitt is editor in chief of Mortgage Banking.
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|Comment:||Q&A with Hugh Harris: veteran mortgage banker Hugh Harris has been on the job at lender processing services as president and chief executive officer for less than half a year, but he's already getting high fives from staff we got an exclusive interview with him shortly after LPS' 2011 year-end|
|Author:||Hewitt, Janet Reilley|
|Date:||Apr 1, 2012|
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