Servicing Strip


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.

  1. Embedded Option

    A provision in a security that is an inseparable part of the ...
  2. Loan Servicing

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  3. Mortgage Servicing Rights - MSR

    A contractual agreement where the right, or rights, to service ...
  4. Mortgage Excess Servicing

    The percentage of the monthly cash flow that remains after the ...
  5. Guarantee Fees

    Fees charged by mortgage-backed securities (MBS) providers, such ...
  6. Maturity

    The period of time for which a financial instrument remains outstanding. ...
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