Mortgage Servicing Rights (MSR) - SmartAsset

Mortgage servicing rights (MSR) allow a third party to perform the day-to-day mortgage servicing duties in exchange for a flat fee, paid by the loan originator. This can and often does happen while borrowers are in the process of repaying their mortgages. However, borrowers may not notice much of a change. Generally, this arrangement is made for the mutual benefit of the mortgage originator and the servicer. Still, it can be beneficial to know the details of mortgage servicing rights if your lender outsources its servicing duties to a third party. Let’s take a closer look at what MSR is and how it can affect your mortgage.

For more help with mortgages or other financial planning challenges, consider working with a financial advisor.

Mortgage Servicing Rights Definition

Oftentimes, when buying a home, you need financing to help you cover the cost. You might have some cash for a down payment, then the rest of the cost of covered by a mortgage lender, which is often a bank. You then pay the mortgage back over a period of 15 to 30 years, plus interest. However, you don’t always make those payments directly to the lender for the life of the mortgage.

In some cases, the lender pays a third-party servicer to maintain the mortgage, performing tasks like sending statements, collecting payments, and managing mortgage insurance fees. Maintaining a mortgage can be costly and time consuming, especially for big banks, which may have a large number of mortgages in their portfolios.

How Mortgage Servicing Rights Work

Instead of keeping up with all the day-to-day tasks of managing mortgages, lenders often outsource them to third parties instead. Then, each time you make a mortgage payment, the servicer will keep a small percentage of it, such as 0.25% of the payment. That is their fee for managing the mortgage; the rest of the payment is usually (but not always) sent to the mortgage lender.

If your mortgage is being handled by a third-party servicer, you probably won’t notice much of a change. The biggest difference is that you will pay the servicer instead of the lender, but the amount of the payments won’t change. The servicer fee comes directly out of the interest paid to the lender, so you don’t pay more due to the arrangement. In general, the lender must contact you at least 15 days before the change, and the servicer should do the same. Hence, you should have plenty of notice that the switch will be happening.

It is not uncommon at all for mortgages to be bought and sold on the open market; the same often happens with student loans, for example. Mortgages, in particular, may be bought and sold on the secondary mortgage market or packaged into mortgage-backed securities. Both are means of reducing the risks associated with owning mortgages.

Mortgage Servicing Rights Example

Imagine you buy a house for $500,000. You put $100,000 as a 20% down payment, but you need financing to cover the rest of the remaining $400,000. So, you finance it with a 30-year fixed mortgage from Big Bank, Inc. You begin making payments, but two years in, BB decides to offload the servicing duties to Mortgages Servicers N.A. Barring any further sales, you’ll make your payments to MS for the remainder of the mortgage, and you’ll also receive statements from MS.

Mortgage Servicing Duties

Mortgage servicers handle all of the day-to-day duties associated with maintaining a mortgage. Some of the most common tasks include:

Sending monthly statements
Collecting monthly payments
Properly allocating principal and interest
Managing property taxes
Managing mortgage insurance
Handling funds in escrow

In essence, anything that goes into handling the mortgage becomes the responsibility of the servicer under this arrangement. Instead of dealing with the mortgage originator, the servicer becomes your single point of contact for anything related to the mortgage.

Why MSR Can Be Beneficial

MSRs can be beneficial for the lender and the servicer, and perhaps even for you, the borrower. The lender may have hundreds or even thousands of mortgages in their portfolio and managing them can be too costly and time-consuming to be sustainable. As a result, they may hire a third party to manage the mortgage for them.

If the mortgage is being managed by a third party instead of by the lender, then the lender can spend more time originating new mortgages instead. Hence, they can spend their time generating new cash flow instead of spending all their time making sure you are making your payments on time. While the latter is important, it’s simply a better use of resources to outsource to a third party willing to take care of those duties for a small fee.

And the arrangement could be beneficial for you because the servicer has more financial incentive to keep you happy. After all, loan servicing might be their entire business model. Meanwhile, the lender may be more focused on attracting new money.

Bottom Line

Managing mortgages can be costly and time-consuming. While banks often extend you the credit to buy your dream home initially, it can quickly become unduly for them to manage the day-to-day tasks. Instead, they may outsource the duties to a third party, who manages the mortgages for a flat fee. That often comes from each mortgage payment, which you then send to the servicer instead of the lender.

Tips for Financing Your Home

A financial advisor can help you make decisions about financing your home. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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