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1 1 (May 06, 2020)

handle is hein.crs/govdaek0001 and id is 1 raw text is: i% 'N\ r Mortgage Servicing Rights and Selected Market Developments May 6, 2020 After a single-family mortgage has been originated, a mortgage servicer receives a fee to perform various administrative tasks-collecting and remitting the principal and interest payments to the mortgage lender; managing the borrower's escrow account; processing the loan title once paid in full; and administering loss mitigation (e.g., forbearance plans) or foreclosure resolution on behalf of the lender if the borrower falls behind or fails to make full payment. Just as a mortgage is an asset for a lender, the right to earn income for servicing a mortgage is an asset for the mortgage servicer. A mortgage servicing right (MSR) generates a servicing fee averaging 25 basis points (0.25% or $250 per $100,000 of an outstanding mortgage balance) per month. This Insight describes the MSR market and pre- and post-COVID-19 (Coronavirus Disease 2019) market developments. MSRs' Financial Risks MSRs can be traded in a separate market from the original underlying mortgage. MSR values are calculated as the discounted sum of projected future cash flows, which are based upon the expected cash flows generated from the underlying mortgage asset. The risks to a MSR's cash flox s are also linked to the risks of the underlying riolgage. * Prepayment risk is the risk that a borrower repays the mortgage ahead of schedule, causing the asset to generate a lower return than expected. If falling interest rates increase a mortgage's prepayment risk, then a linked MSR value also declines in anticipation of future cash payments being terminated. * Credit (default) risk is the risk that a borrower fails to repay the mortgage principal and interest obligations. A default reduces the cash flows and value of a mortgage asset and its linked MSR. Furthermore, the costs to service a defaulted mortgage increase substantially. For a portfolio of mortgages, prospective servicing firms may bid on MSRs via an auction process. After settling on the price, a servicer may borrow via a seailcer advance loan to purchase MSRs, with the expected cash flows as loan collateral. If a rise in one or both of the aforementioned financial risks causes a MSR's cash flow and value to decline, then the servicer would likely receive a margin call, requiring either more collateral to be pledged or the servicer advance to be repaid. Consequently, macroeconomic Congressional Research Service https://crsreports.congress.gov IN11377 CRS NStGHT Prepred for Members aisd C o m m itte e se o ff C oo r- _rr ss s ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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