The collection of mortgage payments and management of escrow accounts, commonly known as Loan Servicing, is a big business.
While some lenders also collect mortgage payments, many focus solely on loan origination and rely on third-party loan servicing companies to handle the collection of mortgage payments and manage escrow accounts. To gain a better understanding of the loan servicing business, it’s helpful to understand the role Fannie Mae, Freddie Mac, and Ginnie Mae play in the mortgage business.
No single lender has an endless supply of money, and all the lenders combined do not have enough capital to meet the ever-increasing demand for homeownership and mortgages in the United States. To overcome this challenge and increase the supply of available mortgage funds, the government created three government-sponsored enterprises (GSEs) known as Fannie Mae, Freddie Mac and Ginnie Mae. These GSEs operate as private companies serving the interests of the government.
If you obtain a conforming, conventional mortgage or a government-backed FHA, VA, or USDA mortgage, chances are your loan will be immediately sold to one of the GSEs. These enterprises were established to regularly purchase loans from lenders, enabling the lender to swiftly recover their funds rather than waiting to collect them gradually over time. This rapid recycling of capital enables lenders to make more loans, aligning with the GSEs’ goal of increasing homeownership opportunities in America.
While the GSEs commit to regularly purchasing loans from lenders, they do not handle the collection of payments or the management of escrow accounts of the loans they acquire. Lenders, under their agreement with GSEs, are referred to as “seller-servicers” because they retain the right and responsibility to service the loans they sell. In exchange for servicing these loans, the GSEs pay the servicer a fee. This fee may vary but typically amounts to roughly 0.250% of each principal and interest payment collected.
For example, if a servicer collects a $1000.00 payment, they remit $997.50 to the GSE that owns the debt and retain $2.50 for themselves. While this seems modest on an individual basis, the cumulative effect can be substantial. For instance, if the servicer collects 1 million payments of $1,000 every month, they could potentially earn $2.5M per month. This illustrates how valuable mortgage servicing rights can be, particularly when managing a large portfolio of loans.
Since mortgage servicing rights hold value, they can be sold by one servicer to another for a fee. Servicing transfers are extremely common in the mortgage business but often take people by surprise and can be a source of frustration if not understood. For more information on servicing transfers, and to alleviate the most common headaches they cause, please CLICK HERE.
Author: Informed Mortgage Team
