Loan Servicing

AAA

DEFINITION of 'Loan Servicing'

The administration aspect of a loan from the time the proceeds are dispersed until the loan is paid off. This includes sending monthly payment statements and collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds), remitting funds to the note holder, and following up on delinquencies.

INVESTOPEDIA EXPLAINS 'Loan Servicing'

Loan servicers are compensated by retaining a relatively small percentage of each periodic loan payment known as the servicing fee or servicing strip. This is usually 0.25% to 0.5% of the periodic interest payment. For example, if the outstanding balance on a mortgage is $100,000 and the servicing fee is 0.25%, the servicer is entitled to retain ((.0025 / 12) x 100,000) = $20 of the next period payment before passing the remaining amount to the note holder.

Loan servicing trades in the secondary market much like mortgage-backed securities (MBS). The valuation of mortgage servicing is similar to the valuation of MBS IO strips. Servicing strips are subject to a great deal of prepayment risk and tend to show negative convexity.

RELATED TERMS
  1. Non-Purpose Loan

    A type of loan that uses an investment portfolio as loan collateral ...
  2. Impound

    An account maintained by mortgage companies to collect amounts ...
  3. Interest Only (IO) Strips

    The interest portion of mortgage, Treasury or bond payments, ...
  4. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  5. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  6. Mortgage Servicing Rights - MSR

    A contractual agreement where the right, or rights, to service ...
Related Articles
  1. Is Loan Protection Insurance Right For ...
    Insurance

    Is Loan Protection Insurance Right For ...

  2. Profit From Mortgage Debt With MBS
    Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

  3. Who bears the risk of bad debts in securitization?
    Investing

    Who bears the risk of bad debts in securitization?

  4. Advanced Bond Concepts
    Bonds & Fixed Income

    Advanced Bond Concepts

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center