What Are Mortgage Servicing Rights (MSR)?
Mortgage servicing rights (MSR) refer to a contractual agreement in which the right to service an existing mortgage is sold by the original lender to another party that specializes in the various functions involved with servicing mortgages.
- The market for MSRs was strong in 2016 due to an improving economy, higher quality mortgage originations, and fewer defaults.
- Hedge funds, banks, and real estate investment trusts (REITs) find these assets attractive because MSRs can yield high amounts of interest.
- SunTrust purchased $8 billion in MSRs in the first quarter of 2016 as a means of earning a solid return on investment (ROI), and within months, its MSR portfolio contained $121.3 billion in unpaid principal balances of loans that the bank was servicing for lenders.
Understanding Mortgage Servicing Rights (MSR)
MSRs have ongoing administrative duties that are regularly processed for the entire length of a mortgage. Common rights included are the right to collect mortgage payments monthly, to set aside taxes and insurance premiums in escrow, and to forward the interest and principal portions to the mortgage lender.
In return, the servicer is compensated with a specific fee that's outlined in the contract established and entered into at the beginning of the servicing agreement.
The mortgage payment amount, interest rate, type of loan, and other factors remain the same. As far as the borrower is concerned, only the address to which payments are sent is changed, and you should contact the servicer with any questions you have regarding your loan rather than your original mortgage lender. Your servicer can change at any time, but you should receive notice from your original lender at least 15 days before it happens, and your new servicer should notify you within 15 days of assuming rights as well.
Federal banking laws let financial institutions sell mortgages or transfer servicing rights to other institutions without consumer consent.
Example of Selling MSRs
Sarah takes out a $500,000 mortgage from Lender A. She sends the lender a monthly payment of principal and interest. Three years later, Lender A decides to transfer its MSR on Sarah's mortgage to Company B. Under the terms of the contract, Company B is paid a fee by Lender A for processing all of Sarah’s remaining mortgage payments.
The mortgage lender can then spend more time and money providing new mortgages while the company assuming the MSR forwards the mortgage payments to the lender.
A lender will often sell MSRs as a means of freeing up lines of credit for lending money to additional borrowers. The majority of mortgages are in effect for 15 to 30 years, and the bank needs billions of dollars to lend money to other consumers requesting mortgages during this time.
In a roundabout way, selling MSRs means more people can become homeowners because the sale of these rights produces revenue.
Lenders also make money by charging fees for originating mortgages and earning monthly interest from payments. Mortgages are simply additional assets that bring in more revenue for banks.