Mortgage Servicing Rights (MSR)
What it is:
Mortgage servicing rights (MSR) is an arrangement by which a third party promises to collect and disseminate mortgage payments in exchange for a fee.
How it works (Example):
Mortgage payments are processed continually over the entire term of a mortgage. These ongoing administrative duties -- called MSRs -- include collecting the monthly payments, allocating interest and principal, managing insurance costs and reserving property taxes. Third-party entities often agree to assume a lender's MSR for a fee.
For example, let's say that John borrows a $100,000 mortgage from Lender ABC. The mortgage has a 30-year term and a fixed rate of 5%. Each month, John sends Lender ABC a payment that includes both interest and principal. Five years into the mortgage, Lender ABC decides that it doesn't want to pay employees to process mortgage payments anymore. Instead, it decides to transfer its MSRs to Company XZY. Under the terms of the agreement, Company XYZ agrees to process all the remaining mortgage payments in exchange for a fee.