Loan servicing is the process by which a company (mortgage bank, servicing firm, etc.) collects the timely payment of interest and principal from borrowers. The level of service varies depending on the type of loan and the terms negotiated between the firm and the investor seeking their services. Anyone with a mortgage makes their regularly scheduled payments to a loan servicing firm. The vast majority of mortgages are backed by Federal housing programs such as Fannie Mae, Freddie Mac, VA, etc.
Mortgage servicing became "far more profitable during the housing boom", and servicers targeted borrowers "less likely to make timely payments" in order to collect more late fees.
Servicers (servicing companies) are normally compensated by receiving a percentage of the unpaid balance on the loans they service. In most cases these companies don't own the loans, but there are exceptions. The fee rate can be anywhere from one to forty-four basis points depending on the size of the loan, whether it is secured by commercial or residential real estate, and the level of service required. Those services can include (but aren't limited to) statements, impounds, collections, tax reporting, and other requirements.
The net present value of the flow of payments received from servicing less the expected costs to servicers creates an asset which remains on the balance sheets of servicers. Since in refinancing periods loans are often quickly prepaid and hence servicing fees cease, the value of these assets is extremely volatile.
Bank of America, JPMorgan Chase, and Wells Fargo are examples of large companies involved in the loan servicing industry.
- Wagner D. (2009). AP IMPACT: Gov't mortgage partners sued for abuses. Associated Press.
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