Mortgage Excess Servicing
What Is Mortgage Excess Servicing?
Mortgage excess servicing is a fee dependent on the percentage of the month to month cash flow of mortgage backed securities (MBS) that remaining parts after the cash flow has been partitioned into a coupon and principal payment for the MBS holder.
How Mortgage Excess Servicing Works
A servicing fee is the percentage of each mortgage payment made by a borrower to a mortgage servicer as compensation for keeping a record of payments, gathering, and making escrow payments, giving principal and interest payments to the note holder. Servicing fees generally range from 0.25% to 0.5% of the outstanding mortgage balance every month. The mortgage excess servicing fee ordinarily goes to the servicer of the loan and may act as a guarantee fee for the underwriter of the MBS.
For instance, in an ordinary MBS deal, in the event that the interest rate on a mortgage is 8%, the MBS holder could receive 7.5%, the servicer of the mortgage receives 0.25% servicing fee and the MBS underwriter gets 0.15% This leaves the leftover 0.10% (8% - 7.5% - 0.25% - 0.15% = 0.10%) as excess servicing.
Mortgage excess servicing for MBS is subject to prepayment and extension risk. While excess servicing is priced, it is valued in light of an estimate of how long the annuity will last. This must be estimated since it can't be known for certain when a mortgage borrower could refinance or in any case pay off their mortgage. The value of excess servicing can change decisively when interest rates change, since changes in current interest rates relative to the interest rate on the mortgage decide how long the annuity of excess servicing associated with that mortgage could last.
Where Mortgage Excess Servicing Comes From
Mortgage excess servicing might be an outcome from the treatment of mortgages that are packaged by the originator, and afterward sold. In the event that the buyer doesn't service the actual loan, they could go into servicing agreement perhaps with the originator or an outsider. Under such an arrangement, the servicer will ordinarily hold the right to receive part of the interest payments made by the borrowers, with respect to the overall pool of mortgages being serviced.
A mortgage serving spread is the amount of interest retained by the servicer, and is respected in part by the servicer as a form of reasonable compensation for the services that were performed. Assuming that there is a portion of a mortgage servicing spread that surpasses what could be considered reasonable compensation for services performed, this is called the excess servicing spread and would address a continuing investment in the interest portion of an underlying mortgage pool.
The Internal Revenue Service (IRS) has recently decided that ownership of certain mortgage excess servicing spreads would comprise a real estate asset and subsequently income from the excess servicing spreads would be treated as interest on obligations secured by mortgages on real property. This ruling was considered applicable for real estate investment trusts for tax purposes.
Features
- Mortgage excess servicing is a fee paid to mortgage servicers for the maintenance of mortgage backed securities (MBS).
- Mortgage excess servicing can emerge from bundling together mortgages into a MBS, where each loan might have various originators or servicers, each charging an alternate rate.
- The excess servicing is left over after the standard mortgage servicing fees are deducted.
