Mortgage Servicing Right

What is a mortgage servicing right?

A mortgage servicing right, or MSR, is the contractual right to service a mortgage loan and receive a fee for doing that work. Servicing includes collecting principal and interest, managing escrow accounts for taxes and insurance, sending statements, helping borrowers, and handling delinquent loans.

How it works

The company that owns a mortgage does not always service it. The servicing right can be kept, sold, or transferred separately from the loan. The servicer usually earns a small percentage of the outstanding loan balance, plus certain ancillary fees, while the loan remains in place.

An MSR is an asset because it represents expected future fee income. Its value depends on assumptions about how long the mortgages will remain outstanding, what servicing will cost, how many borrowers may become delinquent, and what return investors require.

A simple example

A company services 20,000 mortgages and receives a fee each month based on their remaining balances. If many borrowers refinance, those loans are paid off and the related servicing fees end. If borrowers remain in their loans longer, the fee stream may continue, although servicing costs can also change.

The Fly High perspective

Fly High follows MSR economics through the company-specific earnings measure and dividend coverage. We also distinguish cash earnings from accounting valuation changes, because a change in estimated MSR value is not automatically the same as cash received during the period.

This article is for general education. It is not personal investment advice or a recommendation to buy or sell any security.