Mortgage Servicing Rights (MSRs) are an asset that represents the right to service a portfolio of mortgage loans. Servicing is the act of collecting and distributing payments. The value of an MSR is dependent on assumptions, such as prepayment speeds, loan delinquency and discount rates. And any increase in the assumptions will reduce the MSR value, notes Eric Nokken of Wilary Winn, a financial institution consultancy.
Excess MSR and Basic Fees are key components. A $10 million pool of mortgages, with 100 loans and an average principal balance of $100,000, amortized over 30 years at a rate of 6 percent, pay a monthly payment of $60,000. The owner of the mortgage pool receives $57,500 after the servicing company collects 30 basis points, or $2,500 for the collection and distribution of the interest and principal payments. A basic fee of $500, or 6 basis points, is paid to the servicing company. The right to receive Excess MSR, at 24 basis points, or $2,000, can be sold.
Buyers of Excess MSR include mortgage REITs such as New Residential Investment Corp (NYSE: NRZ). The company acquired Excess MSRs on residential mortgage loans with an aggregate unpaid principal balance of over $400 billion. This esoteric asset represents 58 percent of the company’s equity.