Unraveling Mortgage Servicing Rights (MSR): The Hidden Gears Behind Your Home Loan
MSR Definition, Illustration, and Timeline: Understanding Mortgage Servicing Rights, an overview with a practical example, and a look at its historical significance.
Ever wondered who handles the behind-the-scenes tasks for your mortgage payments? Meet Mortgage Servicing Rights, or MSR - the unsung heroes in the mortgage world.
In Layman's Terms:
The mortgage lender strikes a deal with a specialized party to handle the servicing of an existing mortgage. This includes collecting payments, managing taxes and insurance premiums, and fork-handing the interest and principal portions to the lender. In return, the servicer gets a pre-agreed fee.
How MSRs Work:
Mortgages require ongoing administrative duties for their entire duration. Common rights included in MSRs are collecting monthly mortgage payments, setting aside taxes and insurance premiums in escrow, and forwarding the interest and principal portions to the mortgage lender.
The mortgage payment amount, interest rate, type of loan, and other factors remain the same for you, the borrower. Only the address to which payments are sent changes. Any queries regarding your loan should be directed to your servicer, rather than the original mortgage lender. And, your servicer might change at any time, but you should receive a notification from your lender at least 15 days in advance.
Federal Banking Laws:
It's essential to know that financial institutions can sell mortgages or transfer servicing rights to other institutions without consumer consent under federal banking laws[1].
Real-Life Example:
Say, Sarah takes out a mortgage from Lender A. She pays her mortgage to Lender A every month. Fast-forward three years when Lender A transfers its MSR on Sarah's mortgage to Company B. Company B now collects all of Sarah's remaining mortgage payments and sends the money to Lender A, earning a fee for processing the payments[2].
Special Considerations:
Most mortgages run for 15 to 30 years. To be able to lend to more borrowers during this time, lenders often sell MSR[3]. The revenue produced from the sale of these rights helps more people buy homes.
It's also worth mentioning that lenders make money by charging fees for originating mortgages and earning monthly interest from payments. Mortgages are additional assets that bring in more revenue for banks[3].
History of MSRs:
MSRs are in high demand during periods of economic growth due to the yield they offer[4]. Banks, hedge funds, and real estate investment trusts (REITs) find these assets attractive due to their high return potential. However, market conditions, such as interest rates and prepayment assumptions, can impact the value of MSRs[4][5].
What Is Mortgage Excess Servicing?
In simple terms, Mortgage excess servicing is a fee paid to mortgage servicers as a percentage of the excess cash flow in a pool of loans.
Why Do Banks Sell Mortgage Servicing Rights?
Lenders sell MSR to free up capital and lend more money, helping more people finance properties[3].
How Do You Value Mortgage Servicing Rights?
The value of a mortgage servicing right is determined by the discounted present value of future cash flows, adjusted for the expected amount of prepayments[6].
The Bottom Line:
Mortgage servicing rights allow a company to purchase the cash flow from a mortgage without being the original lender[7]. By selling MSR, banks and lenders can free up capital and originate more loans[3]. And for borrowers, nothing changes, except the address where they send their payments.
Learn More:
If you're keen to know more about MSRs, check out Rocket Mortgage. They're the experts you can trust in the mortgage industry. Equal Housing Lender. Licensed in all 50 states. NMLS #3030.
- In the mortgage industry, a servicer might change at any time, but the borrower should receive a notification from their lender at least 15 days in advance, indicating a potential for investing in companies that process mortgage payments.
- Mortgages are additional assets that bring in more revenue for banks, and lenders often sell Mortgage Servicing Rights (MSR) to free up capital and lend more money, such as enabling more people to purchase homes through Initial Coin Offerings (ICO) in the finance sector.
- MSRs are not only in high demand during periods of economic growth due to the yield they offer, but they are also attractive to hedge funds, banks, and real estate investment trusts (REITs) because they provide a stable source of income like a token in a consensus-driven financial business model.
