What are Mortgage Servicing Rights - MSR
Mortgage servicing rights (MSR) refer to a contractual agreement where the right, or rights, to service an existing mortgage are sold by the original lender to another party who specializes in the various functions of servicing mortgages. Common rights included are the right to collect mortgage payments monthly, set aside taxes and insurance premiums in escrow, and forward interest and principal to the mortgage lender. In return for this assistance, the servicer is compensated with a specific fee outlined in the contract established at the beginning of the agreement.
BREAKING DOWN Mortgage Servicing Rights - MSR
MSRs have ongoing administrative duties that are continually processed for the entire length of a mortgage. For example, 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 MSRs 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 may then spend more time and money providing new mortgages while the company assuming the MSRs forwards the mortgage payments to the lender.
Federal banking laws let financial institutions sell mortgages or transfer servicing rights to other institutions without consumer consent. The mortgage’s payment amount, interest rate, type of loan and other factors remain the same. Only the address to which payments are sent is altered.
Reasons for Selling MSRs
A lender may sell MSRs as a means of freeing up lines of credit for lending money to additional borrowers. Since the majority of mortgages are in effect for 15 to 30 years or longer, the bank would need billions of dollars for lending money to every consumer requesting a mortgage. Selling MSRs means more people may become homeowners.
Also, lenders make money by charging fees for originating mortgages, earning monthly interest from payments and selling MSRs for commission. To banks, mortgages are simply additional assets that bring in more revenue.
Example of Selling MSRs
In May 2016, due to an improving economy, mortgage originations of higher quality and fewer defaults, the market for MSRs was strong. Because MSRs may yield high amounts of interest, hedge funds, banks and real estate investment trusts (REITs) find the assets attractive.
SunTrust was one bank that purchased $8 billion in MSRs in the first quarter as a means of earning a solid return on investment (ROI). As of March 31, 2016, SunTrust’s MSR portfolio contained $121.3 billion in unpaid principal balance of loans that the bank was servicing for lenders.