Understanding Mortgage Servicing Rights (MSR)
Mortgage Servicing Rights (MSR) entail a contractual agreement where the rights to service an existing mortgage are transferred from the original lender to a specialized party for mortgage servicing functions.
**Key Takeaways**
- Mortgage servicing rights involve the transfer of mortgage administration tasks, such as payment collection, from the original lender to another financial institution.
- The servicer receives compensation from the lender for these services.
- For the borrower, the only noticeable change is the payment address.
Exploring Mortgage Servicing Rights (MSR)
MSRs involve ongoing administrative tasks throughout the mortgage’s duration, encompassing activities like monthly payment collection, setting funds aside for taxes and insurance, and remitting principal and interest to the lender. In return, the servicer is compensated as stipulated in the contract.
Despite the change in payment address, the mortgage details for the borrower—payment amount, interest rate, etc.—remain constant. Questions regarding the loan should be directed to the servicer rather than the original lender. Any shift in servicers should be communicated within specific time frames to the borrower.
Financial institutions can transfer servicing rights or sell mortgages in compliance with banking laws, without requiring consumer consent.
Example of Transferring an MSR
Illustration: Sarah, with a $500,000 mortgage from Lender A, watches as the servicing rights for her mortgage are passed to Company B. While Lender A focuses on new mortgages, Company B manages Sarah’s remaining payments, and she directs her payments to Company B instead.
Special Considerations
Lenders sell MSRs to enhance their lending capacity, catering to additional borrowers. With mortgages often spanning decades, prudent selection of mortgage lenders is crucial.
Selling MSRs indirectly promotes homeownership by generating revenue.
Besides originating fees, banks generate revenue through monthly interest from mortgages, augmenting their asset profits.
History of Mortgage Servicing Rights (MSRs)
MSRs thrive during economic upswings, attracting hedge funds, banks, and real estate investment trusts due to the high interest returns. Noteworthy returns have been realized through MSR purchases, like SunTrust’s $8 billion acquisition in 2016, reflecting a positive ROI.
Recent reports indicate the buoyancy of MSR values in a burgeoning market, despite some decline in values due to fluctuating interest rates and prepayment projections.
What Is Excess Mortgage Servicing?
Excess mortgage servicing involves compensating servicers from the surplus cash flow post-securitization of a loan basket for maintaining mortgage-backed securities.
Why Banks Sell Mortgage Servicing Rights?
Banks offload servicing rights to expand lending capabilities, enabling more individuals to access property financing.
Valuing Mortgage Servicing Rights
The Federal Housing Financing Agency (FHFA) determines MSR value by discounting future cash flows, considering prepayment expectations.
The Bottom Line
Mortgage servicing rights facilitate cash flow acquisition from mortgages, enabling lenders to enhance their loan provisions. Notably, borrowers’ mortgage terms persist, with the sole change being the payment allocation.