Top Questions Lenders Are Asking About Servicing Rights and Execution Options
As mortgage lenders continue to expand and adapt their business in today’s market environment, many lenders have posed a variety of questions about mortgage servicing rights, the creation of servicing rights, the ownership of servicing cash flows, servicing transfers, and options to sell servicing. Servicing of mortgage loans can be an important, valuable component of a lender’s business and we thought it would be helpful to address some of these topics.
How are Mortgage Servicing Rights created?
When a lender originates a mortgage loan, it creates a loan and corresponding obligation and need to service the loan on behalf of the owner of the loan. A lender that sells a loan to Fannie Mae may choose to retain the right to service the loan for Fannie Mae or sell to another Fannie Mae-approved servicer the right to service the loan for Fannie Mae. A lender that retains the right to service the loan for Fannie Mae may either perform all of the servicing duties and obligations itself or may hire a “subservicer” to handle some, or all, of the servicing duties and obligations.
Once Fannie Mae purchases a loan, the party that services the loan for Fannie Mae is obligated to comply with Fannie Mae’s requirements and service the loan in accordance with the terms of the Servicing Guide from the time the loan proceeds are disbursed to the borrower until the loan is paid off. The servicer’s rights under the contractual agreement to perform the mortgage servicing duties and obligations and collect the associated servicing fee are commonly referred to as a mortgage servicing right (MSR).
If a lender transfers its obligation to service the loan to another servicer, the lender is transferring its “right” to service the loan to the new servicer, but not the ownership interest in the loan, which is retained by Fannie Mae. Transfers of servicing must be made in accordance with the requirements of the Servicing Guide, which includes the need to obtain Fannie Mae’s prior approval of the MSR transfer.
Who owns the MSR Cash Flows?
When Fannie Mae purchases a loan, it purchases the entire note rate (pass-through rate plus the servicing fee) and agrees to provide the applicable servicing fee back to the servicer. The servicing fee is intended to provide the servicer with compensation for its services. The Mortgage Selling and Servicing Contract (MSSC) and the Selling and Servicing Guides provide that Fannie Mae retains the right to terminate the servicer or require the transfer of the servicing rights, either for cause or without cause. If a servicer is terminated or if Fannie Mae requires that servicing be transferred, the servicer’s right to receive the servicing fee also is terminated.
What is the relationship between Servicer Performance and Servicing Transfers?
The MSSC, the Guides, and related amendments and announcements are designed to ensure that all parties to a Fannie Mae transaction are operating in a safe, sound, and transparent manner in order for Fannie Mae to serve as a reliable source of liquidity and funding for lenders and borrowers in communities across the country in all economic cycles.
While underwriting and eligibility standards help to define the characteristics of loans delivered to Fannie Mae, Fannie Mae believes that the quality of the servicing influences the ongoing performance of a loan. Under the MSSC, Fannie Mae engages the servicer to manage its assets (mortgage loans) and the associated risks. If a servicer fails to appropriately service a portfolio of Fannie Mae loans, Fannie Mae may revoke the servicer’s servicing rights without compensation and transfer the portfolio to another servicer or subservicer.
What opportunities does Fannie Mae provide for lenders that choose to sell servicing?
Some lenders choose to sell servicing on some or all of their origination volume. This helps generate operating income/cash flow. To accommodate the variety of execution options lenders may desire, Fannie Mae offers mandatory and best efforts executions, and we also offer a limited number of servicing-released execution options. Fannie Mae provides more than 1,100 lenders of all sizes with access to credit and liquidity. Business strategies may change, but Fannie Mae’s goal, to support the success of every lending partner, remains constant. Our options help lenders make the right decision for their business. For example:
- We have developed bifurcation structures that enable originators to sell us loans on a servicing-released basis where the selling and servicing representations and warranties are bifurcated.
- We offer options through the eCommitOne®/Servicing Execution Tool™ (eC1™/SET™) for sellers that want a servicing-released option for single loan Cash - Whole Loan commitments to Fannie Mae.
Regardless of whether a lender wishes to retain or sell servicing rights, Fannie Mae provides several options that provide our customers with value. Lenders who have questions should contact their account team. In addition, lenders either seeking to retain servicing or sell servicing may reference the information found in the Fannie Mae Servicing Retained/Released Resource Guide.
For more information please refer to Fannie Mae’s Servicing Guide.
Senior Vice President for Business Solution Initiatives
August 27, 2014