Mortgages can last for 10, 15 or 30 years. Naturally, this creates ongoing responsibilities for both the borrower and the lender. If a mortgage is active, it will need to be continually serviced, and the process often contains a lot of moving parts.
While one mortgage lender will want to manage your mortgage loan for the length of your loan term, other mortgage lenders will want to pass the loan servicing responsibilities on to someone else. There’s nothing wrong with this. In fact, it can help make your mortgage easier to manage if it’s placed with a reliable mortgage servicer.
In this article, we will discuss the most important things you need to know about mortgage servicing rights, including how these rights work and how the sale of mortgage servicing rights (MSR) from one company to another might affect the borrower.
What Is the Definition of Mortgage Servicing Rights (MSR)?
The term “mortgage servicing rights” describes the legal right of a company to service a mortgage monthly and enjoy the financial benefits of doing so.
Several different responsibilities come with servicing a mortgage. In many cases, when mortgage servicing rights are transferred from one party to another, they will transfer all rights. In other cases, only some of these rights will be transferred.
The responsibilities involved when servicing a mortgage can include but are not limited to:
- Sending statements and collecting payments: Lenders want to ensure they get paid on a timely basis. Which is why they need to communicate when the borrower’s mortgage is due, what their payment will be and facilitate the collection of the payments.
- Allocating principal and interest to payments: With every mortgage payment, part of the payment goes to paying down principal and part goes to interest. These portions change over time, and it is important to have a loan servicer that can keep track of and administer these changes.
- Managing mortgage insurance fees and property taxes: With most mortgages, property taxes and homeowner’s insurance will be added directly to the monthly payment. This means the servicer will need to ensure both the insurance provider and all taxing authorities are paid on time.
- Taking care of escrow funds: Escrow funds are used to pay the various costs associated with the mortgage, including the property taxes, homeowners and mortgage insurance and other possible expenses.
There may be other tasks included in the agreement, which should all be specifically outlined and identified.
Why Do Lenders Outsource Their Mortgage Servicing Rights?
All mortgages begin with an originator, typically a bank, credit union or online lender. Mortgage lenders make it possible for you to buy a home, and, in exchange, a mortgage lender can make a profit from your mortgage. Let’s assume that you take out a 30-year fixed-rate mortgage for $200,000 at 5% interest.
After issuing the mortgage, lenders will make money from:
- Origination and other fees: Lenders usually charge an origination fee of 0.5% – 1% or more of the loan value for their services. For our $200,000 mortgage, that’s $1,000 at minimum before you make a single payment.
- Principal and interest: If the lender holds onto your mortgage, they collect the principal and interest that you pay them every month. For your $200,000 mortgage, the monthly payment would be $1,073.64 or $12,883.68 per year. At the end of the first year, the lender would collect $9,932.99 in interest and $2,950.73 would go toward the principal.
- Selling the mortgage: Lenders don’t like to keep debt on their books for too long. That’s why they usually package your mortgage with thousands of others to be placed into mortgage-backed securities (MBS). The lenders get a lump sum payment for your mortgage and the aggregators like Fannie Mae and Freddie Mac collect the money that you pay each month toward your mortgage. By selling your mortgage, the lender frees up enough money to offer someone else a mortgage and the cycle continues.
Once they’ve made the money from the origination fees or selling your mortgage, it’s a lot of work to stay on top of your mortgage and many mortgage originators don’t have the bandwidth to deal with it.
If the original lender no longer wants to handle the ongoing responsibilities of servicing the mortgage, that lender might pass the mortgage servicing rights to a third party.
At this point, the original lender will still be the primary holder of the mortgage, but the third-party company will perform all mortgage upkeep duties in exchange for a predetermined fee.
This creates a secondary market for servicing a mortgage. Currently, servicing a mortgage is estimated to be worth up to $250 per month for every $100,000 of the outstanding mortgage balance.
How Do Mortgage Servicing Rights Work?
Here’s an example of how mortgage servicing rights work for the lender and the mortgage servicer.
If we use our $200,000 mortgage example from before, the monthly mortgage payment is $1,073 a month and the servicing rights are about $500.
Even if the lender has to pay the mortgage servicer $500 every month, they still get to keep $573 of your mortgage payment without breaking a sweat.
And when mortgage servicers are processing thousands – or even tens of thousands – of mortgage payments every month, these seemingly small servicing responsibilities can quickly begin to add up.
How much is that worth to the mortgage servicing company? Let’s say a servicing company is responsible for servicing 2,000 mortgages with an average value of $200,000 each. That’s $500 per month per mortgage; so the monthly income from the fees could easily exceed $1 million.
Who Owns Your Mortgage Anyway?
The transfer of mortgage servicing rights from the loan originator to a professional mortgage servicer can be mutually beneficial for all parties involved. From the lender’s perspective, they will no longer need to worry about handling any mortgage servicing responsibilities, which can be both time-consuming and expensive.
And the market for mortgage servicing rights is active. Sometimes the mortgage servicing rights for your mortgage will be transferred right after the mortgage is issued. Other times, the decision will be made later on.
There is no limit to how many times MSR can be transferred from one party to another, and it is not uncommon for these transfers to occur multiple times over a mortgage’s term.
When a transfer does occur, the party initiating the transfer will be required, by law, to notify the borrower. In some cases, this might change who you make your monthly mortgage payments to, though that is not always the case.
Getting a Loan and Paying a Loan May Take More Than One Company
Mortgages typically represent a multi-decade commitment and will involve hundreds of thousands of dollars. This creates a lot of moving pieces in the fast-changing mortgage industry. It is not uncommon for lenders or mortgage originators to pass the responsibility of servicing mortgages to a third party. When done correctly, this can benefit all parties involved.
Congressional Research Service. “Mortgage Servicing Rights and Selected Market Developments.” Retrieved May 2022 from https://crsreports.congress.gov/product/pdf/IN/IN11377