DEFINITION of 'Servicing Strip'

A security created by the stream of cash flows that result from the servicing fee on a mortgage. Servicing strips trade in a secondary market much like mortgage-backed securities do; the seller of the servicing strip has the ability to service the mortgage.

BREAKING DOWN 'Servicing Strip'

Like mortgage-backed securities, servicing strips have an embedded call option that may be exercised by the borrower. When a borrower pays off the mortgage - either through refinancing or by moving to a new residence - the serving strip goes away.

The embedded option must be considered when performing a valuation of a servicing strip.

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