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Definition and Examples of Mortgage Servicing Rights
Unless you use cash, you’ll need to take out a loan to buy a home. Your lender pays the seller the full amount, then you make installment payments to your lender. The amount of each payment is based on your principal, interest rate, property taxes, and insurance. In a process called mortgage servicing, your lender collects your mortgage payments, allocates the appropriate amounts toward your principal and interest, and manages your escrow account for your home insurance and property taxes. However, your lender can also outsource those duties to another company by assigning it mortgage servicing rights (MSR). The third party collects monthly payments from borrowers, then sends the payments to the original lender and receives a fee for doing so. Say you took out a $350,000, 30-year mortgage from a bank. After four years, your bank decides to stop processing mortgage payments. Instead, it contracts out mortgage servicing rights to a third-party company. The new company now has the right to collect your mortgage payments, which it passes along to the bank. It earns a flat fee for this work—which is paid by the bank, not by you.
Acronym: MSR
How Mortgage Servicing Rights Work
When you buy your home, you usually take out a loan from a single mortgage lender. MSRs come in when that lender allows another company to “service” your mortgage by collecting your payment and passing that money back to your mortgage lender. You’ll get a notice from your new mortgage servicer about the shift, but otherwise, your mortgage won’t change. You’ll pay the same amount as you did when your original lender handled your mortgage servicing, although you’ll need to send payments to a new account or address. However, if you have questions about your mortgage, you’ll need to ask the new servicer, not your original lender. Some banks that issue a large number of mortgages don’t always have the same level of resources to devote to servicing their loans. Contracting out mortgage servicing rights to other companies allows the original bank to devote more employee power to other needs, such as originating more loans to more new homeowners. In addition, not all companies have the workers or expertise to create mortgages. Handling mortgage servicing rights is a niche where other companies—usually smaller ones—can earn money by managing administrative tasks without actually owning mortgages.
