They definitely mail it somewhere - only the State Department can issue Passports - the USPS just collects the data - you can just as easily mail in the application yourself.
If you mail it in yourself there are several agencies that depending on what state you live in, you mail to a certain place. I do not know if those are the same places the USPS mails too.
I didn't look at the return address when my Daughter's passport was mailed to us.

Here are a list of places it could possibly be sent: https://travel.state.gov/content/tra...-agencies.html