Mortgage Excess Servicing

AAA

DEFINITION of 'Mortgage Excess Servicing'

The percentage of the monthly cash flow that remains after the cash flow has been divided into a coupon and principal payment for the mortgage backed securities (MBS) holder. This servicing fee typically goes to the servicer of the loan, and is possibly a guarantee fee for the underwriter of the MBS.

INVESTOPEDIA EXPLAINS 'Mortgage Excess Servicing'

For example, in a typical MBS deal, if the interest rate on a mortgage is 8%, the MBS holder might receive 7.5%, the servicer of the mortgage receives 0.25% and the MBS underwriter gets 0.15% This leaves the remaining 0.10% (8% - 7.5% - 0.25% - 0.15% = 0.10%) as excess servicing.

Like an MBS, excess servicing is subject to prepayment and extension risk. When excess servicing is priced, it is valued based on an estimate of how long the annuity will last. This must be estimated since it cannot be known for certain when a mortgage borrower might refinance or otherwise pay-off his or her mortgage. The value of excess servicing can change dramatically when interest rates change, because changes in current interest rates relative to the interest rate on the mortgage determine how long the annuity of excess servicing associated with that mortgage might last.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Mortgage Putback

    The forced repurchase of a mortgage by an originator from the ...
  3. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  4. Extension Risk

    The risk of a security's expected maturity lengthening in duration ...
  5. Commercial Mortgage-Backed Securities ...

    A type of mortgage-backed security that is secured by the loan ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
RELATED FAQS
  1. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  2. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  3. How are American Depository Receipts (ADRs) exchanged?

    American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
  4. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>
  5. What are the differences between debt and equity markets?

    The basic differences between the debt and equity markets include the type of financial interest they represent, the way ... Read Full Answer >>
  6. What does it signify if the term structure of an interest rate's curve is positive?

    When the term structure of interest rates is positive, it is a signal to economists the short-term yields on similar bonds ... Read Full Answer >>
Related Articles
  1. Personal Finance

    The Rise And Fall Of The Shadow Banking System

    We look at the evolution, failure and fallout from the shadow banking system.
  2. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  3. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.
  4. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  5. Bonds & Fixed Income

    Asset Allocation In A Bond Portfolio

    An investor's fixed-income portfolio can easily beat the average bond fund. Learn how and why!
  6. Mutual Funds & ETFs

    Top 3 ETFS for Investing in Germany

    Discover why Germany is considered an economic powerhouse in the eurozone, and learn about the three ETFs that provide investors exposure to Germany’s economy.
  7. Bonds & Fixed Income

    What are Floating-Rate Notes?

    A floating-rate note is a debt instrument with an interest rate that “floats,” or varies. They are also called floaters.
  8. Mutual Funds & ETFs

    Top 3 ETFs For Investing in Brazil

    Discover information and analysis of some of the most popular and best performing exchange-traded funds that offer investors exposure to Brazil.
  9. Home & Auto

    How the Fed Affects Reverse Mortgages

    An in depth look at how the Federal Reserve affects reverse mortgages.
  10. Investing

    Where Are Real Estate Stocks Heading?

    We summarize five economic reports that investors should monitor monthly to keep them informed of where real estate and its related stocks are heading.

You May Also Like

Hot Definitions
  1. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  2. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  3. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  4. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  5. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  6. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!