Mortgage servicing rights are a contractual agreement between the original lender and a third party. It transfers the right of the mortgage to the new party. This third party is likely a servicer company, bank, or another lender. The new servicer takes care of the administration duties surrounding mortgages. This includes maintaining records, sending out payments, and managing escrow accounts. However, a change in servicer does not affect the borrower very much.
After buying a home with a mortgage, you will need to make monthly payments to your lender about a month after closing. In this case, your lender also acts as your mortgage servicer because you send payments directly to that lender. However, your lender may not always be your servicer.
Thankfully, this change doesn’t have a dramatic impact on you or your mortgage. Keep reading to learn more about what mortgage servicing rights are, why lenders switch mortgage servicers, and how these shifts in servicers impact you in the long run.
What are mortgage servicing rights?
When you take out a mortgage and make monthly payments to your mortgage lender, you are participating in a process called mortgage servicing. If a mortgage lender can no longer oversee the administrative tasks of a mortgage, the lender may transfer the mortgage servicing rights (MSR) to a third-party servicing company. This allows the mortgage servicer to take care of the daily tasks involved with a loan. Lenders pay a servicing fee to the mortgage servicing company.
Fortunately, borrowers don’t play a huge role in this shift. The biggest change you’ll experience is a new address to send payments to.
How do they work?
In short, MSRs allow your lender to delegate the responsibilities of managing a loan to another party. Here are the steps of what this process looks like:
- You take out a mortgage loan.
- The lender pays the seller the full amount of the house.
- You pay the lender back in monthly payments.
- The lender collects payments and applies them towards your principal and interest.
- The lender also manages your escrow account.
- If your lender decides to, they can hire a third-party company to manage your loan.
- In doing so, they assign the mortgage servicing rights to the third party.
- The third party is now in charge of collecting the money, distributing it properly, and managing your escrow account.
- The third-party company does not keep the payments. They pass it on to the original lender.
Hank takes out a 15-year mortgage loan from a lender. After 6 years, the lender decides they are not going to process Hank’s mortgage payments anymore. Instead, the lender contracts the mortgage servicing rights to a third-party company. This third-party company will now collect Hank’s payments and pass them to the lender. Hank is not in charge of paying the third-party company.
What happens when your servicer changes?
Interest rates, mortgage payments, and the type of loan all stay the same when your mortgage servicing rights are sold. The biggest changes that borrowers can expect are a new address to send payments to and a new person to direct questions to. The new servicer is usually a bank, another lender, an investor, or a servicing company.
Servicers and lenders must follow strict rules and regulations when they transfer MSRs:
- The original lender informs the borrower of the service change.
- The borrower is told who the new servicer is, their contact information, and the date of transfer.
- The new servicer honors the terms and conditions of the original mortgage loan.
- Servicers notify the borrower of any changes to their homeowner’s insurance.
- Borrowers have a 60-day grace period. During this time, borrowers are not charged with a late fee if the mortgage payment gets sent to the original mortgage lender.
- The new servicer will investigate any disputes and make corrections within 60 business days.
To inform you of a switch in servicer, you’ll likely get a letter that looks something like this:
January 7, 2020
123 Harvard Ave.
Chicago, IL 12345
Re: Illinois Lenders Loan Number 09876
Investor Loan Number 12340XX
Dear Ms. Doe:
Effective June 1, 2020, the servicing of your mortgage will be transferred to MONTANA SERVICING, LLP. Beginning June 1, 2020, please make future payments related to the above referenced loan to MONTANA SERVICING, LLP. You will receive a statement from MONTANA SERVICING, LLP. However, if the statement does not reach you prior to making your next payment, please send your
payment along with ILLINOIS LENDERS coupon to:
MONTANA SERVICING, LLP
P.O. Box 4567
Helena, MT 12345-0001
MONTANA SERVICING, LLP
456 Mainline St.
Helena, MT 12345-0002
Thereafter, payments should be directed to the payment address on your billing statement.
On June 1, 2020, Illinois Lenders will cease to accept payments related to this loan. If your mortgage payment is being drafted, you should notify your bank of the transfer. The new servicer will inform you of their method of accepting payments.
Any payments received by ILLINOIS LENDERS after the transfer will be forwarded to the new servicer. On June 1, 2020, MONTANA SERVICING, LLP will begin accepting your payments.
On or after June 1, 2020, you may contact MONTANA SERVICING, LLP Customer Service Department at (800) 123-4567, if you have any questions concerning your account. Their hours are 8:00 a.m. to 8:00 p.m. Monday through Friday, and 8:00 a.m. to 2:00 p.m. on Saturdays (CST).
Prior to June 1, 2020, you may contact the ILLINOIS LENDERS, Customer Service Department at (800) 987-6543, if you have any questions concerning your account. Our hours are 7:30 a.m. to 6:00 p.m. Monday through Thursday, and Friday 7:00 a.m. to 5:00 p.m. (PST).
At year-end, ILLINOIS LENDERS will send you a statement reflecting your account activity for the portion of the year we serviced your loan. Your new servicer will send a statement for the portion of the year they serviced your loan. You will need to consolidate both statements to obtain the totals you paid for interest and taxes.
It has been a pleasure working with you and we sincerely appreciate the opportunity to have been of service to you.
Customer Service Department
Can I change the company that services my mortgage?
Unfortunately, borrowers cannot choose who services their mortgage. If you’re unhappy with your servicer, you’ll need to refinance to get a new loan by using a lender that doesn’t work with that particular servicer. You can start this search with some of the options below.
However, since you can’t choose who your servicer will be, it’s best to focus on finding the best possible mortgage interest rate and terms rather than worry about who you’ll make payments to after the loan is closed.
What do mortgage servicers do?
A mortgage servicing company handles the day-to-day tasks of managing a mortgage loan, including:
- Maintain records
- Answer questions the borrower has
- Manage insurance fees and property taxes
- Monitor mortgage payments
- Distribute principal and interest to the loan balance
- Collect monthly payments
- Handle loss mitigation
- Manage and send escrow payments
- Send monthly statements to the borrower
- Help borrowers work through delinquencies
Servicers only begin these mortgage servicing activities after the mortgage servicing rights are transferred to them. Mortgage servicers have a contractual obligation to ensure these tasks are completed.
How is my money distributed?
When servicers receive payments, they distribute funds to the following places:
- Taxes, such as property taxes, go to the government.
- Mortgage or homeowners insurance fees go to the insurer.
- Homeowners association fees go to the HOA.
- Principal and interest go to whoever owns the loan.
Why would mortgage lenders use a third-party servicing company?
Many mortgage lenders manage a large volume of mortgage loans, and monitoring multiple loans is time-consuming and expensive. The original mortgage lender may choose to contract out a third-party company to save time and get other tasks done.
Why are banks selling mortgage servicing rights?
Whereas a mortgage lender transfers mortgage servicing rights to free up time, banks sell MSRs to free up lines of credit and make room for more loans.
How do I find out who my mortgage servicer is?
If your original mortgage lender sold your mortgage servicing rights, you can find out who your servicer is by checking your loan statement, or the payment coupon book. There is also mortgage servicing rights website (MERS), a free service that provides the current servicer and investor (owner of the note) for loans registered on the MERS® System.
- Mortgage servicing rights are a contractual agreement between the original lender and a third-party servicing company. It transfers the right of the mortgage to the third-party company.
- Mortgage lenders choose to contract out a third-party company to save time and get other tasks done.
- Mortgage servicing rights do not drastically affect the borrower.
- The borrower does not manage or pay for mortgage servicing rights.
View Article Sources
- What happens if the company that I send my mortgage payments to changes? — Consumer Financial Protection Bureau
- Risks to Firms Holding Mortgage Servicing Assets — Board of Governors of the Federal Reserve System
- How Mortgage Brokers Rip You Off — SuperMoney
- Mortgage Industry Study — SuperMoney
- Best Mortgage Lenders for First-Time Homeowners — SuperMoney
- What Is a Mortgage Note? — SuperMoney
- Escrow in a Mortgage: What Is It and Why Is It Important? — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.