Mortgage servicing rights is a contractual agreement in which the original lender sells the mortgage servicing rights to another party. This third party performs different functions required to service the mortgage.
With my deep understanding of real estate concepts and years of experience in the industry, I’m here to teach you how to define mortgage servicing rights. This is important for clearing the real estate exam and for practicing as a real estate agent in your state.
In this post, I’ll define Mortgage Servicing Rights (MSR) and explain how it works. I’ll also discuss its effects on mortgages. Let’s read on!
What Are Mortgage Servicing Rights?
Mortgage servicing rights is a legal arrangement in which the original lender assigns a third party to collect the mortgage payments from their borrower. With this agreement, the third party can perform daily mortgage duties for a fee. The third party is the mortgage servicer, which specializes in various mortgage duties.
The original lender pays a fee to the new lender for performing the duties of their mortgage. Besides that, nothing changes for the borrower except the address for mortgage payments.
The original lender sells the mortgage servicing rights to another lender. The new lender takes responsibility for mortgage functions. These functions include payment collections and then forwarding them to the mortgage originator.
In return for these services, the mortgage originator pays the servicer, the lending institution. The fee paid by the mortgage originator to the servicer is outlined in the contract signed with the servicing agreement.
How Do Mortgage Servicing Rights Work?
Sometimes mortgage lenders outsource their duties instead of keeping up with all the daily mortgage tasks. The borrower doesn’t notice any change if a third-party servicer handles their mortgage. The only difference with the payments is that the borrower will pay the servicer instead of the lender. The monthly mortgage and payment remain the same.
The borrower doesn’t have to pay because there is a third-party involved. The original lender is responsible for paying the servicer. When the lender gives responsibilities to a servicer, they transfer the mortgage servicing rights to them too. Some lenders transfer all the rights, while others transfer only a few rights to the servicer. The following are the responsibilities involved in mortgage servicing:
Collecting Monthly Payments
Mortgage lenders want to make sure that their payments are on time. To receive payments, the lenders must stay in touch with the borrower. The lender needs to notify the borrower of payment collection whenever the mortgage payment is due. If the lender wants to get rid of these duties, they can hire a third party to the payment collection for them.
Allocating Interest and Principal to Payments
The interest and principal are added to the total amount with monthly mortgage payments. However, how much the interest and principal go to the total monthly payment can change. Especially when it’s an adjustable-rate mortgage, the lender needs to adjust payments from time to time. A mortgage servicer also keeps track of these tasks and administers the changes.
Managing Mortgage Insurance Fees and Property Taxes
The homeowner’s insurance, property taxes, and other fees add to the total payment. The mortgage servicers have to ensure that all types of mortgage fees are paid on time.
Managing Escrow Funds
Escrow funds include fees and costs associated with the mortgage. These costs include insurance fees, origination fees, and other possible expenses.
Benefits of Mortgage Servicing Rights
Mortgage servicing is important for successful home ownership. While some mortgage lenders service their loans, others give servicing rights to a mortgage servicer. The mortgage servicer receives a fixed percentage of the unpaid principal balance.
Lenders also pay a certain fee to the mortgage servicers for these duties. There are many benefits of mortgage servicing rights for the lender and the mortgage servicer. A mortgage servicer performs these things to benefit the lender:
- Processes and manages the original lender’s payments on time and accurately
- Builds a relationship with the borrower and solves various issues that might arise during the mortgage term
- Communicate with the borrower if there are any missed payments
- Work with borrowers with delinquent mortgages and find out whether they wish to stay in the home
- Ensure the borrowers know all their options if they make late mortgage payments, such as a short sale or loan modification
- Help with a graceful exit when the borrower doesn’t want to pay the remaining mortgage loan or leave the home
- Acting as a communication point between the mortgage lender and the borrower
Mortgage Servicing Rights vs. Mortgage Assignment
Mortgage Servicing Rights and Mortgage assignment are both legal agreements between two pirates. With Mortgage Servicing Rights, the original lender gives the servicing rights to another company.
The servicing rights allow the company to take payments on behalf of the lender. However, the mortgage servicer doesn’t have the right to use these payments from the borrower. The servicer must collect and pass them on to the original lender.
On the other hand, Mortgage Assignment is when the original lender transfers the mortgage completely to a new lender. The new lender will now own the lender and receive the payments from the borrower. The original lender doesn’t involve in mortgage duties after selling the mortgage to another lender.
Mortgage Servicing Rights Example
David wishes to purchase a $425,000 property. He pays 20%, which is $85,000, as a down payment to the seller and borrows the remaining amount from Bank A. The following is a breakdown of the mortgage loan:
- Mortgage balance: $340,000
- Interest rate: 5%
- Term: 30 years
- Monthly Payment: $2,171
David pays $2,171 to Bank A every month, including interest and principal. However, Bank A doesn’t wish to carry on the mortgage functions after ten years. Thus, it transfers the mortgage servicing rights to company B, a mortgage servicer.
After receiving the mortgage servicing rights, company B has the right to receive monthly payments on this mortgage loan from David. Company B collects payments from David on behalf of Bank A, and Bank A compensates Company B for providing mortgage services.
Frequently Asked Questions
What Is the Meaning of Servicing the Mortgage?
Mortgage servicing means the mortgage tasks carried out during the mortgage term. These tasks include collecting mortgage payments, allocating interest rates and principal payments, and managing property taxes and mortgage insurance. When the original mortgage lender gives the rights to do these tasks on their behalf, it is called mortgage servicing rights.
What Is an MSR in Banking?
MSR means Mortgage Servicing Rights. It is a contractual agreement between the lender and a third party. With this agreement, the original lender gives the rights to another party. This party specializes in mortgage loans.
Why Do Lenders Give Their Mortgage Servicing Rights to Other Companies?
Lenders give their mortgage servicing rights to third parties because they no longer want to handle the day-to-day mortgage tasks. Mortgages have ongoing responsibilities which the lender must carry out. However, when they don’t have time, they outsource these responsibilities to other companies that specialize in mortgage tasks. This also creates a secondary market where mortgage servicing is carried out.
What to Know for the Real Estate Exam
Mortgage servicing rights refer to a contractual agreement where the original lender gives the rights to service the mortgage to a third party. The original lender gives a fee to the third party for performing these services on their behalf.
The third-party (mortgage servicing company) is responsible for carrying out the regular mortgage functions of the original lender. It is common for mortgage lenders to outsource their mortgage servicing responsibilities to other companies. If done properly, this benefits all the properties involved in the agreement.
I hope that you have a clear understanding of how Mortgage Servicing Rights work. However, this is not all you need to prepare for the real estate exam. Learn more about such complicated terms easily through our comprehensive list of Real Estate Vocabulary.