What are mortgage servicing rights (MSRs)?
Here’s how a change in servicer could affect your mortgage
When applying for a mortgage, many people assume that their lender will be the primary contact point for the entire loan. However, this might not always be the case.
Your lender has the right to transfer the servicing of your mortgage to another company. It can do this without your consent, and you usually don’t get a say on who services your loan.
Although a transfer of mortgage servicing rights (MSRs) is unlikely to significantly impact your loan, you may need to send your payments elsewhere and direct questions or concerns to the new servicer.
Lenders transfer MSRs so they can outsource the administrative tasks of managing a mortgage.
Jump to insightThe mortgage servicing company charges the original lender a fee for performing these tasks.
Jump to insightAn MSR transfer typically doesn’t affect the borrower, aside from where they send their monthly mortgage payments.
Jump to insightUnderstanding mortgage servicing rights
Mortgage servicing rights (MSRs) represent a contractual agreement between the original lender and a mortgage servicing company. The contract grants the company the right to manage the loan on behalf of the mortgage originator.
The mortgage servicing company charges a small fee for its services. Its duties usually include collecting payments, managing escrow accounts, answering the borrower’s questions and more.
Outsourcing these tasks allows mortgage lenders to free up additional time, money and resources so they can generate more mortgages and increase their profits.
What’s included in an MSR?
When your mortgage lender sells your MSRs, the new servicer takes over specific functions to facilitate the repayment of your mortgage loan.
Here are some of the tasks the mortgage servicing company performs:
- Collecting monthly payments
- Sending statements each month
- Issuing principal and interest to payments
- Handling fees for mortgage insurance
- Taking care of property taxes
- Managing escrow funds
- Fielding questions from the borrower
If necessary, the mortgage servicing company can also handle a default or foreclosure.
An example of MSR
Imagine you've spent several weeks searching for the perfect home and lender and finally decided to apply for a mortgage. You make a 3% down payment, and things go smoothly for the first few years as you make your monthly mortgage payments without any issues.
However, one day, you get a notice in the mail that your lender is selling the servicing rights of your mortgage to a third party.
While your monthly payment and interest rate will stay the same, you’ll need to send your monthly payments to the new servicer and direct any mortgage-related questions to them.
» MORE: How to choose a mortgage lender
How MSRs work
Lenders and investors frequently trade mortgages and their servicing rights on the secondary mortgage market. They’re often bundled as mortgage-backed securities. Mortgage ownership can be risky, so the secondary market may be a safer option.
When your lender transfers your MSRs, the new servicer takes over the management of your mortgage. It benefits both parties — the lender saves time and money, and the mortgage servicing company earns a mortgage servicing fee.
The mortgage servicing fee is usually a small percentage of each payment, which the company deducts from the amount you already pay. Typically, the new servicer forwards your payment to the mortgage originator after taking their fee (but not always).
How do MSRs affect borrowers?
Typically, a change in servicer doesn’t have much impact on the borrower's day-to-day experience. The most significant difference will be where you send your payments.
“If your MSRs change, you'll receive notification from both the new and old servicers,” said Misha Mikhaylov, the CEO of Llama Loan, a small business financing company. “This will include new payment instructions and details about your escrow account, so it's critical to review these documents so you can avoid missing a payment on accident.”
While your monthly payment and loan interest will remain the same, MSRs may affect new loans offered by mortgage lenders.
“In terms of interest rates, MSRs can have a minor impact through the secondary markets,” said Mikhaylov. “For example, if there is a higher demand for MSRs because of the stability they can provide, this could entice some lenders to offer more competitive rates and originate more loans.”
» COMPARE: Best mortgage lenders
FAQ
Will I be notified if my mortgage is sold?
Yes, you should get a notice from your old servicer 15 days before it transfers your MSRs to a new servicer.
What does it mean when a lender sells the mortgage servicing rights?
When a lender sells the MSRs, your monthly payment will stay the same, but you’ll likely have to send it to a new address.
Can anyone buy mortgage servicing rights?
Yes, both lenders and individual investors can sell and purchase mortgages and mortgage servicing rights on the secondary mortgage market.
Bottom line
Your lender may transfer the servicing rights of your mortgage to a third party at some point during your loan. The mortgage servicing company will take up the responsibility of managing your mortgage in exchange for a small fee.
However, MSR transfers are unlikely to affect your loan other than who you direct your questions to and where you send your monthly payments.
Article sources
- Office of the Comptroller of the Currency, “The bank sold my mortgage loan to another bank without my permission. Can it do this?” Accessed April 5, 2024.
- Consumer Financial Protection Bureau, “What happens if the company that I send my mortgage payments to changes?” Accessed April 5, 2024.
