Mortgage Servicing Rights (MSR) are the rights given to a financial institution to administer the loan on behalf of the original lender. MSR is the term used to describe “the right, obligation, and benefit to service a mortgage loan, including collecting and remitting payments from the borrower.”

Mortgage servicers typically have the technical ability to accept and apply payments, process payment- and non-payment-related transactions (such as loan modifications), communicate with and advise borrowers, monitor and enforce loan performance, and remit the resulting payments to the loan owner.

Mortgage Servicing Rights (MSR) generally have a contractual life of five to seven years, with an option to renew. During the life of the servicing rights an institution is responsible for collecting payments, applying payments to a mortgagor’s loan balance in order to maintain its status and arranging any other necessary activities to remain compliant with all regulations and laws.

The opportunity to buy and sell Mortgage Servicing Rights (MSR) can create a great deal of economic value. MSR markets represent a specialized form of securitization; they provide a way to Increase liquidity of mortgage portfolios and can free up capital that is tied up in servicing assets It can also provide servicers access to loans which provide them with more volume, greater geographic diversification and lower costs.

When originating a mortgage loan, many lenders opt to sell the servicing rights to another financial institution as a means of quickly generating cash. Generally, when a loan originator sells a mortgage servicing right, the original lender retains a portion of the principal and interest payments on the corresponding loan in the form of a servicing fee throughout the term of the servicing rights agreement.

Mortgage Servicing Rights (MSR) provide additional benefits to financial institutions as they transfer some of the operational risk of mortgage servicing to the lender of the MSR. Furthermore, since the price of MSRs is relatively low compared to the present value of future payments, it is economically attractive than to non-bank servicers.

In summary, Mortgage Servicing Rights (MSR) are a contractual agreement between the loan originator, the financial institution and the loan servicer. It provides many benefits to all parties involved, from the value it creates by providing liquidity through securitization to the ability to transfer operational risks away from the servicing institution. It is then easy to understand why this market remains an important tool for many lenders, servicers, and investors.