What is Mortgage Servicing Rights (MSR)

A contractual agreement where the original mortgage lender sells the right to service an existing mortgage to another party that specializes in the various functions involved with servicing mortgages is called Mortgage servicing rights (MSR).

Understanding MSR

There are continuous administrative duties for the MSRs which are regularly processed for the entire duration of a mortgage.

The right to collect mortgage payments on a monthly basis, setting aside taxes and insurance premiums in escrow, and forwarding the interest and principal portions to the mortgage lender are some of the common rights of the MSR.

And at the beginning of the servicing agreement itself, a specific fee is defined and entered into the contract which is in the form of compensation to the servicer.

As far as the borrower is concerned factors like the mortgage payment amount, interest rate, type of loan, and others remain the same, only the address to which payments are sent is changed.

The borrower should contact the servicer, instead of their original mortgage lender if they have any questions regarding their loan.

The servicer can change at any time, but the borrower receives a notice from their original lender at least 15 days before the change takes place, and the new servicer should also notify the borrower within 15 days of assuming rights.

Financial institutions are allowed to sell mortgages or transfer servicing rights to other institutions without consumer consent according to federal banking laws.

Special Considerations

MSRs are sold by lenders as a means of freeing up lines of credit for lending money to additional borrowers.

As the majority of mortgages are for a period of 15 or 30 years and the bank needs billions of dollars to lend money to other consumers who are wanting mortgages during this time.

When MSRs are sold it means that more people can become homeowners because the sale of these rights generates revenue.

When lenders are originating mortgages they charge fees and also earn monthly interest from payments.

A bank earns more revenue because of mortgages as they bring additional assets

History of MSRs

In recent years due to the improving economy, higher quality mortgage originations, and fewer defaults the MSR’s market was strong.

These assets are found attractive by hedge funds, banks, and real estate investment trusts (REITs) because MSRs can yield high amounts of interest.

For example, in the first quarter of 2016, $8 billion in MSRs was purchased by SunTrust this was done as a means of earning a solid return on investment (ROI), and in a few months time, SunTrust’s MSR portfolio contained $1.123 billion in unpaid principal balances of loans that the bank was servicing for lenders.

In June 2019, National Mortgage News reported that MSRs to be been one of the best-performing fixed-income asset classes over the past five years.

But the news also reported that as medium- and long-term interest rates have fallen since October 2018, projected and actual mortgage prepayment assumptions have increased, leading to the expected average life of MSRs to shorten significantly.

This has led to the MSR values from April to May going down to half consistently.

The National Mortgage News, reports that the demand from MSR buyers is still very strong, and in regards to the MSR values there is general consensus.

Conclusion

The originator of a mortgage sells mortgage servicing rights to another financial institution, which then takes over the administration of the mortgage, their responsibility includes assignments like collecting payments and forwarding them to the originator.

A fee is paid by the original lender to the servicer for performing this work. Except for the address to which the payment needs to be made there is no change for the borrower.

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