Ever wondered how those folks behind the scenes of your mortgage actually get paid? Well, buckle up, because we’re about to dive into the murky world of mortgage servicing fees and uncover the secrets of how these companies turn a profit.
The Lowdown on Servicing Fees
Mortgage servicers aren’t directly involved in the loan creation or investment process, in contrast to investors or loan originators. Rather, they serve as intermediaries, taking care of routine duties like processing paperwork, keeping track of escrow accounts, and collecting payments. They receive a servicing fee as payment for this service.
The amount of this fee typically depends on two key factors:
- Loan Type: Different loan types come with varying levels of risk and administrative complexity. For instance, a subprime loan with a higher risk of default will likely command a higher servicing fee than a conventional loan with a stellar credit rating.
- Borrower Credit Rating: The borrower’s creditworthiness plays a crucial role in determining the servicing fee. A borrower with a lower credit score, indicating a higher risk of delinquency or default, will likely face a higher fee compared to a borrower with a pristine credit history.
The Servicing Fee Breakdown
Typically, servicing fees range from 025% to 0.5% of the outstanding mortgage balance annually This translates to a monthly fee of 1/12th of the annual rate. So, if you have a $200,000 mortgage with a 0.5% servicing fee, you’ll be paying $83.33 per month just for the servicer’s administrative efforts.
The Perverse Incentives of Servicing Fees
Now, here’s where things get a bit dicey. The way servicing fees are structured creates some perverse incentives for mortgage servicers. Let’s break it down:
- Principal Reduction Disincentive: When a borrower makes a principal payment, it reduces the outstanding balance, directly impacting the servicer’s fee income. This means servicers have less financial motivation to help borrowers reduce their principal and pay off their loans faster.
- Profit in Delinquency: Believe it or not, servicers can actually benefit from borrowers falling behind on payments. Late fees and other delinquency charges add to their bottom line. Additionally, if a loan goes into foreclosure, the servicer gets reimbursed for all the fees and expenses incurred, even before the investors recoup their losses.
The Shadowy Side of Servicing
The mortgage servicing sector has come under scrutiny for its dubious practices, especially in the wake of the 2008 housing crisis. It was alleged that servicers put their own financial gain ahead of the welfare of borrowers, frequently delaying loan modifications and driving borrowers toward foreclosure even in cases where better options were available.
A Call for Reform
In an effort to address these problems, the Consumer Financial Protection Bureau (CFPB) has suggested changes to the servicing fee structure. But the industry has vehemently opposed these changes, claiming that they would make borrowing more expensive for borrowers.
The Bottom Line
Because of the conflict of interest created by the current mortgage servicing fee structure, servicers are encouraged to put their own profits ahead of the interests of borrowers. This necessitates openness, responsibility, and a thorough review of the compensation structure for these businesses.
Additional Resources
- Tellus Resource Guide: How Do Mortgage Servicers Make Money?
- Mother Jones: How to Make Money by Screwing Your Customers
Remember, knowledge is power. Gaining knowledge about how mortgage servicers make money will help you advocate for ethical and fair practices in the industry and become a better informed borrower.
How Loan Servicing Works
The bank or financial institution that issued the loans, a non-bank organization with expertise in loan servicing, or a third-party vendor for the lending institution can all handle loan servicing. In order to keep one’s creditworthiness with lenders and credit-rating agencies, borrowers must make timely principal and interest payments on their loans. This is sometimes referred to as loan servicing.
Loan servicing was traditionally seen as a core function held within banks. Since banks made the initial loan, it only made sense that they would also be in charge of loan administration. That was, of course, before widespread securitization of loans changed the nature of banking and finance in general. After loans, and mortgages specifically, were packaged into securities and removed from a bank’s records, loan servicing turned out to be a less lucrative business venture than loan origination.
As a result, the loan servicing portion of the loan life cycle was made public and divided from the loan origination portion. The industry has become particularly reliant on technology and software because of the burden of maintaining records associated with loan servicing as well as the evolving expectations and habits of borrowers.
What Is Loan Servicing?
The administrative facets of a loan, from the time the proceeds are distributed to the borrower until the loan is repaid, are referred to as loan servicing. Loan servicing entails remitting money to the note holder, collecting payments, keeping track of payments and balances, collecting and paying taxes and insurance (as well as managing escrow funds), sending monthly payment statements, and monitoring any delinquencies.
- A third-party vendor, a bank or other financial institution that issued the loan, or a business that specializes in loan servicing can all perform loan servicing.
- Monthly payment collection, tax payment, and other loan-related activities take place between the time the proceeds are distributed and the loan’s repayment.
- Securitization of loans made loan servicing less profitable for banks.
- These days, loan servicing is a separate industry, and businesses get paid by keeping a tiny portion of loan payments.
How do mortgage lenders make money?
FAQ
What is the primary source of revenue for mortgage servicers?
Who pays for mortgage servicing?
How do mortgage servicing rights make money?
How much do loan servicers make?
|
|
Annual Salary
|
Monthly Pay
|
|
Top Earners
|
$73,000
|
$6,083
|
|
75th Percentile
|
$62,000
|
$5,166
|
|
Average
|
$49,278
|
$4,106
|
|
25th Percentile
|
$35,000
|
$2,916
|
How does mortgage servicing work?
Mortgage servicing has a few layers. The servicer collects payments and sends money to the mortgage note holder and the entities paid from an escrow account for property tax, homeowners insurance, any mortgage insurance premiums, any HOA dues, etc. The lender originated your loan.
How do mortgage lenders make money?
Mortgage lenders can make money in a variety of ways, including origination fees, yield spread premiums, discount points, closing costs, mortgage-backed securities (MBS), and loan servicing. Closing costs fees that lenders may make money from include application, processing, underwriting, loan lock, and other fees.
What does a mortgage servicer do?
One of the primary roles of a mortgage servicer is collecting and distributing payments. Every month, you’ll remit your mortgage payment to your mortgage servicer. The servicer credits your payment to your account the day it is received. In turn, the servicer distributes your payment to your lender and funds your escrow account, if you have one.
Can I choose a mortgage servicer?
A: A mortgage lender is a company that loans you money, but it isn’t necessarily the one that manages your loan. That’s a mortgage servicer, and unfortunately, you cannot choose your servicer. They’re responsible for sending statements, accepting payments and managing escrow accounts.