Every mortgage loan has a servicer that collects payments, manages escrow accounts, handles defaults, and remits principal and interest to investors. The right to perform this function is a mortgage servicing right, and it has economic value. Lenders either retain MSRs, keeping the servicing income, or sell them to other servicers. This decision significantly affects how lenders price loans and what they compete on.
How MSRs Are Valued
An MSR is valued as a multiple of the annual servicing fee, which is typically 25 basis points of the outstanding loan balance for conventional loans. A $300,000 loan generates $750 per year in servicing fees. Multiplied by a standard MSR pricing multiple of 3 to 5 times the annual cash flow, the MSR is worth $2,250 to $3,750 at origination. That value is sensitive to prepayment speed: if the borrower refinances quickly, the servicer collects fewer payments and the MSR is worth less than modeled.
How MSRs Affect Lender Behavior
- ✦Lenders who retain MSRs may price slightly above market on rate in exchange for a lower origination fee because they capture the MSR value as additional revenue
- ✦Lenders who sell MSRs have no long-term interest in the borrower relationship and may price more aggressively on rate to win volume
- ✦When MSR values fall, as they do when prepayment speeds rise, lenders who are heavy MSR holders may become less competitive on rate to protect their balance sheets
- ✦Recapture: servicers who retain MSRs want to refinance their own borrowers when rates drop, to avoid losing the servicing stream
Aria can explain how lender economics affect program pricing and availability for specific loan types. Ask at vicariointel.com.
7-day free trial. No credit card required.
Ask Aria How Lender Economics Affect Your Rate Options →