Mortgage servicing rights (MSR) refer to a contractual agreement where the right to service an existing mortgage is sold by the original mortgage lender to another entity that specializes in managing mortgages.
Key Takeaways
- Mortgage servicing rights are sold by the mortgage originator to another institution, which then assumes administrative tasks like collecting payments and forwarding them to the originator.
- The original lender compensates the servicer with a fee for these services.
- For borrowers, only the payment address changes, with no other loan terms being affected.
Grasping the Essence of Mortgage Servicing Rights
MSRs involve ongoing administrative duties for the entirety of a mortgage term. These rights commonly include collecting monthly mortgage payments, setting aside taxes and insurance premiums in escrow, and forwarding the interest and principal portions to the mortgage lender. Servicers are compensated with a predefined fee as outlined in their servicing agreement.
For borrowers, elements like the mortgage payment amount, interest rate, and type of loan remain unchanged. They should direct any loan-related questions to the new servicer instead of the original lender. Note that the servicer may change at any time, with borrowers receiving a notification at least 15 days prior from the original lender and the new servicer.
Federal banking laws enable the sale or transfer of mortgage servicing rights without borrower consent.
Enhanced Illustration of an MSR Sale
Consider Sarah, who obtained a $500,000 mortgage from Lender A and made monthly principal and interest payments. Three years later, Lender A decides to transfer its MSR on Sarah’s mortgage to Company B. Under their agreement, Company B is remunerated with a fee from Lender A for processing future payments, allowing the original lender to focus on issuing new mortgages.
Special Considerations
Lenders often sell MSRs to free up lines of credit for lending to additional borrowers. Since mortgages typically last between 15 to 30 years, selling MSRs enables banks to accumulate resources for new loan offerings. This indirectly supports more people in becoming homeowners due to generated revenue.
Moreover, lenders earn profits from originating mortgages and interest on monthly payments, turning mortgage assets into another revenue stream.
Historical Perspective on MSRs
During economic upswings, the MSR market thrives due to high-quality mortgage originations and fewer defaults. Investment entities like hedge funds, banks, and real estate investment trusts (REITs) are attracted to MSRs for their potential high returns. For example, SunTrust’s acquisition of $8 billion in MSRs in early 2016 resulted in a substantial portfolio of loans for their service.
However, National Mortgage News reported in June 2019 that the MSR asset class had been one of the best performers over five years. Yet, falling interest rates from October 2018 accelerated mortgage prepayments, shortening the average life expectancy of MSRs and decreasing their values. Despite this, demand for MSRs remains strong.
Exploring Mortgage Excess Servicing
Mortgage excess servicing refers to a fee paid from the excess cash flow after pooling and securitizing loans. This fee compensates mortgage services for maintaining a mortgage-backed security.
Why Banks Sell Mortgage Servicing Rights
Banks sell MSRs to free up lines of credit, enabling them to extend more loans and help more people afford property.
Valuing Mortgage Servicing Rights
The Federal Housing Finance Agency indicates that the value of mortgage servicing rights is derived from the discounted present value of future cash flows, adjusted by expected prepayment amounts.
The Bottom Line
Mortgage Servicing Rights empower entities other than the original lender to manage mortgage cash flows. This enables banks to allocate capital for new loans, thereby expanding homeownership opportunities. For borrowers, the only noticeable change will be the new address for payment submissions.
Related Terms: Mortgage Lender, Mortgage Payments, Real Estate Investment Trusts (REITs), Loan Servicing.
References
- Federal Trade Commission. “Making Payments to Your Mortgage Servicer”.
- Suntrust Banks. “Form 8-K - April 17, 2006”.
- National Mortgage News. “With interest rate volatility, servicing assets suffer”.
- Federal Housing Financing Agency. “Value of Mortgage Servicing Rights for Managing Counterparty Credit Risk”.
