Mortgage Servicing Rights: What Homeowners Should Know

One of the most important financial choices you will ever make is buying a home. While a lot of homeowners have heard of concepts like interest rates, escrow accounts, and monthly payments, one hidden idea that is essential to the mortgage business is Mortgage Servicing Rights (MSRs). What is an MSR, therefore, and why should a homeowner care about it?

If you've ever questioned why your mortgage lender switched a few months after you purchased your house, or why your payments now go to a new business, you've been directly impacted by MSRs.

In this article, we will discuss what an MSR is, its relevance to a homeowner, and the things to keep an eye on when your loan gets transferred.

Let's get into it.

What is an MSR?

Mortgage servicing takes place after the loan closes and financing is finalized. It involves using escrow accounts to handle the borrower's annual insurance and tax charges in addition to collecting monthly loan payments. While the mortgage servicing rights (MSR) typically pass to another business, some lenders continue to service the mortgage after closing.

Mortgage servicers also advise clients on how to take out home equity loans, trade up or downsize their homes, or adjust payments to avoid default as life events change. Mortgage servicers oversee and manage the foreclosure process as required.

The Process of Mortgage Servicing

A lender has two options when funding your mortgage:

• Take care of your debt on your own and keep the servicing rights.
• Transfer the servicing rights to a different business, usually a mortgage servicer.

It is possible to sell these servicing rights independently from the loan itself because they are valuable assets. A portion of the interest you pay and the costs associated with managing the loan are collected by the buyer, who makes money.

Why Are MSRs Sold by Lenders?

Lenders offer mortgage servicing rights for a number of reasons:

• Free Up Capital: Lenders can offer additional loans as selling MSRs provides them with an instant cash infusion.
• Lower Risk: By shifting servicing duties to others, they can lower their risk of loan defaults or late payments.
• Focus Core Business: Rather than overseeing long-term loan management, many lenders prefer to focus on loan origination.

What This Means to You as a Homeowner

MSRs can have an impact on your experience as a borrower, even if they don't directly alter your loan terms. Here's how:

1. Your Service Provider May Alter
It's conceivable to begin with one mortgage service and end up paying another. This transfer may be unclear, especially if you don't receive the notification or if the payment instructions alter without warning.

Advice: Prior to committing money to a new service supplier, carefully read notices and confirm any changes with your present provider.

2. The Quality of Services Can Change
On the customer service scale, certain service providers give poor ones a run for their money. Factors like prolonged wait times, inaccurate billing, or lack of communication could potentially influence your enjoyment.

3. Different Escrow Management
Your servicer is in the position of managing escrow accounts, which are used to pay insurance and property taxes. A new business may have different regulations regarding deficits, refunds, and escrow analysis.

Can You Choose Your Service Provider?

Unfortunately, no. Usually, homeowners have little control over who handles their loan servicing. But you do have choices:

• Refinance with a lender that retains servicing: You may have greater control if service quality is an issue by refinancing with a lender who maintains servicing in-house.
• Raise outstanding issues: You can report to the Consumer Financial Protection Bureau (CFPB) if you're having trouble with a servicer.

The Reasons for Existing Mortgage Servicing Rights

It is important to be thinking of the structure of mortgage finance in order to fully understand the function that MSRs play in the mortgage ecosystem.

In general, lenders don't want to hold onto loans indefinitely. In order to raise money for new loans, lenders frequently offer their existing loans to secondary market investors like Freddie Mac and Fannie Mae.

They might additionally give another company the right to service that loan at the same time. Although you do not really own your mortgage, the servicing business then serves as your point of contact.

Benefits for Lenders

• Liquidity: Selling MSRs brings in money right now.
• Reduced Risk: Servicing is expensive and time-consuming.
• Operational Focus: Instead of overseeing long-term loan management, lenders may concentrate on creating new loans.

Benefits for Companies That Provide Services

• Continuous Revenue Stream: Servicers get fees, which are usually a small portion of the original amount that hasn't been paid.
• Business Scale: Big service providers are able to effectively handle hundreds or millions of loans.

The Impact of MSRs on the Housing Market

MSRs have a significant effect on Wall Street in addition to homeowners.

Assessment of MSRs
Interest rates, borrower credit risk, prepayment rates, and service expenses all affect an MSR's value. Borrowers refinance more frequently as interest rates decline, which might lower the value of MSRs because the loans are paid off sooner.

MSRs as Resources
MSRs are included under assets on the balance sheets of financial institutions. Like mortgage-backed securities, they are occasionally packaged and offered for sale in secondary markets.

Managing your homeownership path with more trust may be achieved by knowing what an MSR is and how mortgage servicing options work. Being educated allows you to ask the right questions and make adjustments with ease, even when you can't always pick who serves your loan.

Pro Tip: Always keep copies of all your escrow statements, servicer emails, and mortgage payments. You'll need paperwork in the event of a transfer in case something goes wrong.
Although mortgage servicing rights could seem like a back-office technicality, they have an annual impact on millions of homeowners. Knowing what MSRs are, why lenders sell them, and how they impact your loan can help you manage your mortgage and protect your most important investment.