What Are Mortgage Servicing Rights?
Melissa Brock4-minute read
February 28, 2022
When you buy a home, you may think your mortgage lender will be your point of contact throughout the life of your mortgage.
Sometimes, however, the mortgage servicing rights 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 mortgage and what it means for you, your mortgage company and the mortgage servicer. We'll explain how mortgage servicing rights work, outline the tasks included in a MSR agreement and dive into why lenders often outsource their mortgage servicing rights.
Mortgage Servicing Rights (MSR) Definition
Often, the loan originator, the entity that created your note and mortgage, does not take care of the weekly, monthly and yearly activities involved in making sure you make your mortgage payments and meet other requirements. This is where mortgaging service rights come into play. Mortgage servicing rights surface when the original mortgage lender sells the right to service a mortgage to another party. This third party, a mortgage servicing company, specializes in specific mortgage functions, all done through a contractual agreement.
But what exactly does mortgage servicing mean? Mortgage servicing refers to the day-to-day tasks of handling your mortgage. A mortgage servicer may send monthly payment statements, collect monthly payments, manage insurance fees, answer your questions, maintain records, manage escrow funds and more. Under this contractual obligation, it could also involve curing defaults and foreclosing on a property.
How Mortgage Servicing Rights Work
Let's look at a closer look at how mortgage servicing rights actually work. 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. The third party does not keep the mortgage payments – the payments will go back to the original mortgage lender (but that may not always be the case). The only significant change for you, the borrower, is that you send your payments elsewhere (instead of to your original lender). The substance of the original contractual agreement stays the same. However, lenders may sell the servicing rights of your loan and you may not get to choose who services your loan.
Mortgage servicing rights also constantly enter the capital markets, which consist of individuals and institutional investors that invest money either directly or indirectly into real estate. Lenders and investors buy and sell mortgages and the servicing rights that go along with them on the secondary mortgage market all the time. The secondary mortgage market provides a way to reduce some of the risks associated with owning a mortgage. Many mortgages become packaged up into mortgage-backed securities (MBS) for investors.
What Tasks Are Included In The Agreement?
The third party that possesses the mortgage servicing rights then takes on the responsibility for the following loan servicing tasks:
- Collecting payments on a monthly basis
- Sending statements
- Allocating principal and interest to payments
- Managing mortgage insurance fees
- Managing property taxes
- Taking care of escrow funds
An MSR Mortgage ExampleLet's say you take on a mortgage loan for your dream home. You work with a lender to learn more about the various types of mortgages available, the interest rates for each product your lender offers and more. Finally, you make some ultimate decisions, wait for an inspection, pay your down payment and the keys to the home become yours. You officially own real estate!Later on, your mortgage lender decides to transfer the mortgage servicing rights to a third-party company. From there, the third party collects the mortgage payments on behalf of the mortgage lender. The mortgage lender compensates the third-party mortgage servicer with a flat fee.
Why Do Lenders Outsource Their Mortgage Servicing Rights?
Lenders outsource these tasks because it's often costly and timely for them to service the large volume of mortgage loans they offer – it often lends itself toward a better allocation of resources. 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 manpower toward these types of tasks. Finally, another reason lenders outsource their mortgage servicing rights is that third-party lenders can collect a fee with little risk involved.
The Bottom Line
Your original lender may not handle the everyday tasks of helping with your mortgage. Sometimes lenders sell the mortgage servicing rights to your loan for a fee. This means that the original mortgage lender sells the rights to service a mortgage to another party through a contractual agreement.
Why do mortgage lenders outsource to third parties? They often take part in this process because it saves money and time. Lenders can also then spend more time originating loans to other potential homeowners. Lenders and investors buy and sell mortgages and the servicing rights that go along with them on the secondary mortgage market. Many mortgages become packaged up into mortgage-backed securities (MBS) for investors.
What do these third-party mortgage servicers do? They handle the day-to-day tasks involved with your mortgage. A mortgage servicer may do a number of things, including servicing assets such as the following: handling monthly payments (and the statements associated with them), managing mortgage insurance fees, allocating principal and interest in your mortgage payments, managing property taxes and escrow funds and more. The mortgage servicing company may also reconcile defaults and foreclose on properties.
You, the borrower, won't face any specific payment changes – your payments just to the mortgage servicing company. However, as the borrower, you may not get to choose the company that actually services your loan.
Ready to learn more? Visit the Rocket Mortgage learning center to learn details about servicing your mortgage.
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