What are mortgage servicing rights?

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

When you buy a home, you may think your mortgage lender will be your point of contact throughout the life of your loan.

Sometimes, however, the mortgage servicing rights (MSR) are sold to a third-party company, which then takes over the responsibility of ensuring the loan gets paid back.

Let's go into more detail about an MSR and what it means for you, your mortgage company, and the mortgage servicing company. In this way, you can begin to understand how mortgage servicing rights work.

Mortgage servicing rights (MSR) definition

Mortgage servicing rights are an arrangement where a third-party collects mortgage payments on behalf of the lender in exchange for a fee.

To better understand what mortgage servicing rights are, it helps to know this arrangement is quite common in the mortgage industry.  The company servicing your mortgage often does not own the loan itself. Ownership may belong to the original lender, another financial institution, or an investor such as Fannie Mae or Freddie Mac. It's important to emphasize that the sale of MSRs doesn’t change anything about the terms of your original loan.

In addition to the management of your monthly mortgage payment, the new servicer is also responsible for answering any questions you have related to the loan and should be your first point of contact if you ever have payment trouble.

How mortgage servicing rights work

Let's take a closer look at how mortgage servicing rights actually work.

1. Your mortgage lender, the originator of your mortgage, sells the mortgage servicing rights and outsources tasks related to your mortgage to a third party (another financial institution) in exchange for a mortgage servicing fee.
2. The third party forwards the payments to the mortgage lender or investor (Fannie Mae, Freddie Mac, etc.).
3. The noticeable change for you, the borrower, is that you send your payments elsewhere. The substance of the original contractual agreement stays the same. However, lenders may sell the servicing rights of your loan and you don’t get to choose who services your loan.

Some lenders, including Rocket Mortgage for certain loans, may retain servicing rights.

What tasks are included in an MSR agreement?

The third party that possesses the mortgage servicing rights then takes on the responsibility for the following loan servicing tasks:

• Collecting payments monthly
• Sending statements
• Allocating principal and interest to payments
• Managing mortgage insurance fees
• Managing property taxes
• Taking care of escrow funds for homeowners insurance
• Transferring your payments to the appropriate mortgage investors, taxing authorities, or insurers
• Providing options to help people stay in their home or gracefully exit if there’s payment trouble

Why do lenders outsource their mortgage servicing rights?

Lenders outsource these tasks because it's often costly and time-consuming for them to service the large volume of mortgage loans they offer. They may consider it a better allocation of resources to enlist some outside help.

Contracting out mortgage servicing rights of residential mortgages to other companies allows lenders to spend more time originating more loans to others instead of devoting capital toward payment collection tasks.

Also consider interest rates. If interest rates are higher, it can make sense for lenders to take on servicing so that they get the monthly fees as income when the market is slower. Then, when rates drop, they can offer these clients the chance to refinance if it makes sense for them and their goals.

FAQ

Here are a few frequently asked questions about mortgage servicing rights and how they impact your loan.

What does it mean when a lender sells the mortgage servicing rights?

This means that the original mortgage lender sells the rights to service a mortgage to another party through a contractual agreement. The lender or mortgage investor still holds the original loan and your repayment terms remain the same.

Why do mortgage lenders outsource to third parties?

Mortgage lenders often participate in this process because it saves them money and time. Lenders can also then spend more time originating loans to other potential homeowners. It can be a matter of hedging. Lenders will take on more servicing when interest rates are higher, generating steady income during slower market periods.

What do third-party mortgage servicers do?

Third-party mortgage servicers handle the day-to-day tasks involved with your mortgage, such as handling monthly payments, managing mortgage insurance fees, allocating principal and interest in your mortgage payments, managing property taxes and homeowners insurance, and providing options if you have payment trouble.

FAQ

Lenders sell mortgage servicing rights on a regular basis, so it’s important to understand how these rights work before you get a loan.

Does selling mortgage servicing rights change my interest rate or payment?

No, a change in who owns your mortgage servicing rights will have no impact on your interest rate or payment barring any unrelated changes to your loan, such as a refinance.

What’s the difference between my lender and my servicer?

Your lender is the entity that you worked with when applying for a loan and that funded the loan in the first place. The servicer is the entity that manages the day-to-day of your loan, such as collecting payments.

What should I do if I’m confused after a servicing transfer?

If you’re confused about a loan servicing transfer, start by reviewing any notices you received about the transfer and make sure to update your loan payment information to the new information that was provided to you. If you still have questions, contact your new servicer for help.

The bottom line: Getting a new mortgage servicer doesn’t change the terms of your loan

A change in your mortgage servicing rights affects who manages your loan day-to-day, not who owns your debt. Getting a new loan servicer doesn't alter your interest rate, loan balance, or loan terms. It simply means you'll send your monthly payments to a new company and contact them if you ever need help or have questions.

If you feel ready to take the next step in your homeownership journey, you can apply online today.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.