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It is very rare for a mortgage company to collect the mortgage payments directly from the borrower. So, the task of collecting mortgage payments is transferred to a third party servicing mortgage rights. If you do not know what a mortgage servicing right is and how you can use it for your benefit, keep reading this guide.
What Are Mortgage Servicing Rights?
In simple words, it is an agreement between a licensed servicing company and a loan originator. This agreement transfers the right to collect a debt from the lender to the servicing company. The servicing company then manages the loan. These collections can include:
- monthly mortgage or escrow payments
- principal and interest from each payment
- property insurance or taxes
- monthly statements or notices
The lender pays a monthly fee for the services provided by the servicing company. The servicing company then transfers all collected payments to the lender after it is collected and recorded in their system.
A mortgage servicing right (MSR) is a strip of interest from the loan. Based on the accounting rules, it becomes an asset when a mortgage loan is sold. The strip of interest is paid to the servicer to perform the servicing duties based on the investor guidelines.
The mortgage servicer collects the payments on the mortgage loan and distributes these payments to the appropriate authority including tax authorities, insurance companies, and investors.
It is important because only with this you can understand how the mortgage industry operates. Also, you will know why there is a different company name when your payment is collected. Unless you don’t understand it, you won’t know how the investment trust or real estate stock collects fees from servicing loans.
MSR is important because, without it, it is impossible for you to decide whether you want to transfer to a third party for a small fee or want to do it personally.
Mortgage Servicing Rights Explained
You might already know how the payments are secured by the collateral of a piece of property. Mortgage loans are used to pay for the property. However, the borrower now owes the lender the principal amount and the interest amount.
In this, the lender is secured because if the borrower defaults or is unable to repay the loan, the lender can take possession of the property and sell it to cover its loss. Although the collection of payments is on the third party, the substance of the original contractual arrangement with the lender remains the same. Additionally, the point of contact for information about the mortgage would be the third-party company as well.
The Mortgage Servicing Rights Contract
The MSR contract is unusual as it differentiates from most fixed-income assets. It is not a passive income instrument: to earn the cash flows the MSR investor must perform real services and the more efficiently they can perform those services the higher their return on the MSR instrument.
Mortgage servicing rights have ongoing administrative duties that are regularly processed for the entire length of a mortgage. It includes the right to collect mortgage payments monthly, set aside taxes and insurance premiums in escrow, and forward the interest and principal portions to the mortgage lender. In return for this, the servicer gives a specific fee, which is mentioned in the contract that has been established and entered into the beginning of the servicing agreement.
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Interest rate, mortgage payment amount, type of loan, and other factors remain the same. For borrowers, only the address to which payments are sent is changed. You should contact the servicer and not the original mortgage lender with the questions you may have regarding your loan.
The servicer can be changed at any time, but for this to happen, it is important for your lender to notify you within 15 days of assuming rights as well.
Selling a Mortgage Servicing Rights (MSR)
To understand it better, let’s study the case of Sarah. Sarah took a $500,000 mortgage from lender A. She sends the lender a monthly payment of principal and interest. Three years after taking the mortgage, the lender decides to transfer its MSR on Sarah’s mortgage to company B.
Under the signed contract, company B will be paid a fee by lender A to manage Sarah’s remaining mortgage payments. The mortgage lender can now spend more time and money on providing new mortgages while the company assuming the MSR forwards the mortgage payments to the lender.
MSRs: Things to Consider
A lender sells MSRs as a means of freeing up lines of credit for lending money to other borrowers. The majority of mortgages are for 15 to 30 years, and the bank requires billions of dollars to lend money to other consumers requesting mortgages during this time. Generally, selling MSRs means that more people can become homeowners as 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.
The Bottom Line
MSRs have been one of the best performings fixed income asset classes in the past 5 years. Although medium and long interest rates have fallen a bit causing the expected average life of MSRs to shorten, the demands from MSR buyers are still very strong and frequent. Thus, there remains a general consensus around MSR values.
If you need expert guidance around the mortgage servicing rights or any help regarding the mortgage, please feel free to reach out to us. We will provide professional guidance and assist you to find the best for your needs.
At Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to get a mortgage for a home or land in Canada, leave us a message and we will try to connect you with local realtors and sourcing for financing.