Definition
Servicing in the realm of real estate refers to the comprehensive set of actions involved in managing a mortgage loan. This encompasses billing borrowers, collecting payments, and maintaining related records and reports. Additional responsibilities may include analyzing the loan’s performance, following up on defaults, and handling escrow accounts related to taxes and insurance. Mortgage bankers typically handle these tasks and charge a fee for their services, often calculated as a percentage of the loan balance.
Example:
Gray, a mortgage banker, originates loans and packages them in groups for sale to large investors. After the loans are sold, Gray continues to service these loans by charging a monthly fee which is ⅜ of 1% of the outstanding loan balance. This fee covers the administrative burden of loan management, thus relieving the investors from this responsibility.
Examples:
- Loan Payment Collection: A mortgage servicer collects monthly mortgage payments from borrowers and ensures the application of payments towards the loan principal, interest, taxes, and insurance.
- Tax and Insurance Escrow Management: A servicer manages the collection and payment of property taxes and homeowners insurance through an escrow account on behalf of the borrower.
- Default Management: If a borrower misses a payment, the servicer contacts them to arrange a repayment schedule and takes necessary actions to mitigate losses, such as initiating foreclosure if needed.
Frequently Asked Questions
What is the role of a mortgage servicer?
A mortgage servicer manages the day-to-day administration of a mortgage loan, which includes billing, payment collection, customer service, and managing tax and insurance escrow accounts. They may also handle default management and coordinate with borrowers to address any payment issues.
How do mortgage servicers make money?
Mortgage servicers typically charge a fee for their services, which is often expressed as a percentage of the outstanding loan balance. This fee compensates the servicer for managing the loan on behalf of the investor who owns the mortgage.
What happens if a borrower misses a payment?
If a borrower misses a mortgage payment, the servicer will typically contact the borrower to arrange for repayment. This can include setting up a new payment schedule or providing options for loan modification. If the borrower continues to default, the servicer may eventually initiate foreclosure proceedings.
Are mortgage servicers the same as mortgage lenders?
No, mortgage servicers are not the same as mortgage lenders. Mortgage lenders provide the initial loan to borrowers, whereas mortgage servicers manage the ongoing administration of the loan after it has been closed, and possibly sold to investors.
What is an escrow account in terms of mortgage servicing?
An escrow account is managed by the mortgage servicer to collect and hold funds for property taxes and homeowners insurance. The servicer then uses these funds to pay the respective bills on behalf of the borrower when they are due.
Related Terms
- Mortgage Loan: A loan secured by real property through the use of a mortgage note.
- Escrow Account: An account in which funds are held in trust while two or more parties complete a transaction.
- Default: The failure to fulfill the legal obligations of a loan, such as not making timely payments.
- Foreclosure: The legal process by which a lender takes control of a property from a borrower who has failed to make mortgage payments.
- Loan Modification: A process in which the terms of a loan are altered outside the original contract to facilitate easier payments for the borrower.
Online Resources
- Consumer Finance Protection Bureau (CFPB): About Mortgage Servicing
- Mortgage Bankers Association (MBA)
- Federal Housing Finance Agency (FHFA)
References
- Consumer Financial Protection Bureau. “What is mortgage servicing?” CFPB. [Accessed 2023].
- Federal Housing Finance Agency. “Mortgage Servicing Explained”. FHFA. [Accessed 2023].
Suggested Books for Further Studies
- “Mortgage Servicing: How to Turn Happy Homeowners into Loyal Customers” by Chris Roush
- “Residential Mortgage Lending: Principles and Practices” by Henry V. Cunningham and Silvia I. Golebiowski
- “Foreclosure Investing For Dummies” by Ralph Roberts
